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Author: 


Giblin,  James  Vincent 


Title: 


Practical  federal  income 
tax  procedure,  1922 

Place: 

Boston 

Date: 

1922 


cn-^XiuS-  H 


MASTER   NEGATIVE   * 


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Giblin,  James  V 

Practical  federal  income  tax  procedure  1922. 
A  condensation  of  existing  tax  regulations  and 
important  decisions,  by  James  V.  Giblin...  With 
acknowledgment  of  thankn  for  valuable  suggestions 
from  J.  T.  Drury...  ^and^  I.  B.  Baruch...-  4th 
ed...  rev.,  Feb.  1,  19J32...   Boston,  Hickey, 
C1922. 

115  1.    27^   cm. 

In  order  to  presppt  to  the  reader  a  con- 

(Continued  on  next  card) 


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Giblin,  James  V.  Practical  federal  income  tax 
procedure  1922.    ol922,  (Card  2) 

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been  arranged  in  printed  form. "-foreword. 


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Columbta  ^Hmberittp 

inttjeCttpof^togorii 

LIBRARY 


School  of  Business 


V 


^ 


Practical 

Federal  Income  Tax  Procedure 

1922 

A  Condensation  of  Existing  Tax  Regulations 

and  Important  Decisions 


£y  JAMES  V.  GIBLIN,  A.B.,  A.M, 

CERTIFIED  PUBLIC  ACCOUNTANT  (MASS.) 

Special  Lecturer  on  Income  Tax  Procedure  at 
Boston  University,  College  of  Business  Adminis- 
tration; Boston  University,  School  of  Law; 
Head  ^James  V,  Giblin  Company,  Accountants 
Boston  New  York  Washington 


With  Acknowledgment  of  Thanks  for  Valuable  Suggestions  from 
J.  T.  DRURY,  B.Sc,  A.M.,  LL.B.  I.  B.  BARUCH,  Ph. B.,  A.M.,  LL.B. 


CERTIFIED  PUBLIC  ACCOUNTANT  (MASS.) 
ATTORNEY-AT-LAW 

Formerly  Lecturer,  Massachusetts  University 
Extension  Course  at  Harvard 


ATTOR  NE  Y- AT-LA  W 
PUBLIC  ACCOUNTANT 

Formerly  of  Department  of  Mathematics 
Princeton 


FOURTH   EDITION 

SECOND  IMPRINT 

Revised,  February  /,  1922 


Price  ^3.75 


\ 


n 


COPYRIGHT,  I9ai,  BY 

E.J.  ^IC^^EY,  Publisher 

755  BOYLSTON  STREET,  BOSTON 


; 


4 


FOREWORD 


At  the  present  time  there  is  an  over-abundance  of  Income  Tax  literature  and  refer- 
ence books  being  offered  to  the  public.  However,  in  practically  all  cases,  these  works 
are  a  reprint  of  the  Law,  together  with  quotations  from  numerous  Supreme  Court  de- 
cisions and  Treasury  Department  regulations.  Such  publications,  excellent  in  themselves, 
are  invaluable  for  reference  and  other  purposes,  but  are  often  confusing  and  incompre- 
hensive  to  the  reader  who  wishes  to  obtain  an  introduction  to  the  subject  of  Income  Tax 
Law  and  a  clearer  understanding  of  the  more  difficult  sections. 

In  order  to  present  to  the  reader  a  condensed  summary  statement  of  the  Law  and  at 
the  same  time  explain  fully  the  more  difficult  sections  and  articles,  these  Lectures — given 
at  several  of  the  Schools  in  and  about  Boston  —  have  been  arranged  in  printed  form. 
They  do  not  represent  in  themselves  a  complete  text  book,  but,  if  fully  mastered  by  the 
reader  who  desires  to  obtain  a  thorough  understanding  of  the  fundamentals,  they  should 
make  the  reading  of  the  actual  Law  a  much  easier  task. 

To  illustrate  the  purpose  of  the  work.  Lecture  I  takes  up  the  personal  exemptions 
allowed  an  individual.  In  the  Law  nothing  more  than  the  general  requirements  for  an 
individual  obtaining  exemption  are  given.  In  the  average  text  book  these  are  recopied 
and  decisions  inserted.  In  these  Lectures  numerous  practical  illustrations  are  given  which 
should  enable  the  reader  to  grasp  the  points  involved  more  readily. 

The  Lectures  have  also  been  used  as  a  means  of  transferring  the  theoretical  legal 
phraseology  of  the  regulations  to  the  actual  practical  Income  Tax  Returns,  with  their 
multiplicity  of  figures,  schedules  and  computations,  so  that  a  mastery  of  the  Lectures 
should  enable  the  reader  to  write  the  majority  of  Income  Tax  Returns  with  only  an 
occasional  reference  to  the  Law  and  decisions. 

Throughout,  cross-references  have  been  avoided,  topics  rarely  met  with  in  practice 
omitted,  and  the  series  so  arranged  as  to  make  the  Lectures  valuable  to  the  business  man, 
student,  or  reader  desirous  of  mastering  the  important  fundamentals  in  the  briefest  possi- 
ble time. 


THE  PUBLISHER 


Boston,  Mass. 
February  i,  1922 


CONTENTS 
FIRST  SECTION  -  INDIVIDUALS 


LECTURE  I 


Individual  Income  Tax  Procedure 
Kind  of  Taxes 
Rates  of  Taxes 
Computation  of  Tauces 
Persons  Taxable  auid  Exempt 
Income  Taxable. 


Page 
.  1 


LECTURE  II 


Exclusions  from  Gross  Income 

Items  Excluded  by  Law 

Other  Items  Excluded 

Liberty  Bond  Interest  Excluded. 


8 


LECTURE  III 


Gross  Income 

Items  Generally  Included 
Items  Subject  to  Special  Rules 
Effect  of  March  1,  1913,  Value 


19 


LECTURE  IV 
Allowable  Deductions 28 


LECTURE  V 


Preparation  of  Form  1040A 

Income  Tax  Return  of  Individual 
With  Net  Income  Less  Than  $5,000. 


38 


LECTURE  VI 


Preparation  of  Form  1040 

Income  Tax  Return  of  Individual 
With  Net  iQcome  of  More  Than  $5,000 


47 


SECOND  SECTION  -  CORPORATIONS 


LECTURE  VII 

Page 

Corporation  Income  TEixable 59 

Kinds  of  Taxes 

Rates  of  Taxes 

Corporations  Exempt 

Corporation  Income  Taxable  and  Exempt 

LECTURE  VIII 
Invested  Capital 71 

LECTURE  IX 
Invested  Capital  (continued) 80 

LECTURE  X 
Computation  of  Corporation  Taxes  in  Special  Cases 85 

LECTURE  XI 

Preparation  of  Form  1120 91 

Corporation  Income  and  Excess  Profits  Tax  Returns 

LECTURE  XII 
Miscellaneous  Topics 109 


LIST  OF  PHOTOGRAPHIC 
REPRODUCTIONS  OF  RETURNS 


Page 
PLATE    I  Form  1125.   Taxable  Interest  on  Liberty  Bonds 15 

"     II  1040A.  Page  1.   Individual  Income  Tax  Return, 

Income  Less  than  $5, 000 41 

"    III  1040A.   Page  2.   Individual  Income  Tax  Return, 

Income  Less  Than  $5 ,  000 42 

"     IV  1040.  Page  1.  Individual  Income  Tax  Return, 

Income  in  Excess  of  $5,000 50 

"      V  1040.  Page  2.  Individual  Income  Tax  Return, 

Income  in  Excess  of  $5,000 51 

"     VI  1065.  Partnership  Income  Tax  Information  Return 52 

"    VII  1120.  Page  1.  Corporation  Income  and  Profits 

Tax  Return 95 

"   VIII  1120.  Page  2.  Corporation  Return 96 

"     IX  1120.  Page  3.   Corporation  Return 97 

"     X  1120.  Page  4.  Corporation  Return 98 


-1- 


LECTURE  1. 

INDIVIDUAL  INCOME  TAX  PROCEDURE 

Kinds  of  Taxes. 
Rates  of  Taxes 
Computation  of  Taxes. 
Persons  Taxable  and  Exempt. 
Income  Taxable. 

KINDS  OF  TAXES:  There  are  two  taxes  levied  against  the  incomes 
of  individuals,  the  NORMAL  TAX  and  the  SURTAX. 

RATES  OF  TAXES:  The  Normal  Tax  is  at  the  rate  of  4%  on  the  first 
$4,000  of  taxable  income,  and  8%  on  all  taxable  income  above  that 
amount.  "Taxable  Income,"  for  Normal  Tax  purposes,  begins  after  an 
allowable  exemption  or  credit  has  been  subtracted  from  an  individual's 
net  income.  Thus  "A"  earns  $7,000  per  year.  He  is  single  and  allowed 
an  exemption  of  $1,000.  Therefore,  of  the  $7,000  received" by  "A"  the 
first  $1,000  is  not  taxable;  the  amount  earned  from  $1,000  to  $5,000. 
represents  the  first  $4,000  taxable,  and  is  assessed  at  the  rate  of 
4%;  the  balance  earned,  from  $5,000  to  $7,000  is  taxed  at  the  rate  of. 
8%.  Non-resident  aliens  are  subject  to  an  8%  tax  on  all  their  net 
income,  after  an  exemption  of  $1,000. 

RATES  OF  TAXES:  The  Surtax-or  additional  tax-is  levied  against 
net  incomes  above  $5,000,  at  the  following  rates:  1%  for  income  from  " 
$5,000  to  $6,000,  2%   for  income  from  $6,000  to  $8,000,  and  1%   addi- 
tional tax  for  each  $2,000  of  additional  income  up  to  $100,000,  after 
which  the  rate  increases  in  steps  from  48%  to  65%  (See  Surtax  Tables, 
Regulations  45,  pages  21-24).  Thus  a  person  receiving  $10,000  salary 
would  pay  a  Surtax  of  $110,  computed  as  follows:  The  amount  earned 
from  $5,000  to  $6,000  would  be  taxed  at  the  rate  of  1%,  or  $10;  from 
$6,000  to  $8,000  (or  the  next  $2,000)  at  2%,  giving  $40;  and  from 
$8,000  to  $10,000  (or  the  next  $2,000)  at  3%,  giving  $60.  The  total 
Surtax  would  be  $10  plus  $40  plus  $60,  or  $110.  This  same  income  is 
also  subject  to  the  Normal  Tax. 

For  taxable  income  earned  in  1922,  the  Surtax  begins  at  $6,000 
instead  of  at  $5,000,  and  is  at  the  rate  of  1%  for  income  from  $6,000 
to  $10,000;  2%  for  income  from  $10,000  to  $12,000,  etc.,  up  to  50% 
for  income  in  excess  of  $200,000  (See  Sec.  211 -New  1921  Revenue  Act). 

COMPUTATION  OF  TAXES:   "B,"  single,  has  an  income  of  $12,200. 
His  total  tax  would  be  $936,  computed  as  follows: 

NORMAL  TAX  SURTAX 

Total  Taxable  Income $12,200  1%  from  $5,000  to  $6,000      $10 

Exemption  for  single  person.  .1,000  2%       "   6,000  to  8,000 40 

3%   "   8,000  to  10,000 60 

Taxable  Income  (Normal  Tax). 11, 200  4%   "  10,000  to  12,000 80 

4%  on  first  $4,000  taxable. . .4,000  5%   "  12,000  to  12,200 ...10 

8%  on  balance  tstxable 7,200  

4%  on  $4,000.  .$160        Surtax $200 

8%  on  $7,200.  .576        Normal  Tax  ..736 

Normal  Tax $736       Total  Tax ."|§36 


-2- 

Note  the  Surtax  Computation  for  the  income  from  $12,000  to  $12,200. 
In  the  Government  Regulations  and  the  Income  Tax  Forms,  the  Surtax 
Tables  give  the  tax  for  $12,000,  it  being  necessary  only  to  add  5% 
of  $200  to  that  figure.   In  computing  the  Surtax,  it  is  necessary 
to  remember  that  it  begins  at  $5,000.  Thus  while  a  single  man 
earning  over  $5,000  may  be  allowed  am  exemption  of  $1,000  and  a 
married  man  one  of  $2,000,  before  either  is  subject  to  the  Normal 
Tajc,  each  pays  the  same  Surtax. 

PERSONS  TAXABLE:   All  citizens  of  the  United  States,  whether 
residents  of  this  country  or  not,  and  all  foreigners  residing  in 
this  country  and  not  merely  transients,  are  taxable.  Non-resident 
aliens,  that  is,  persons  living  in  foreign  countries,  atnd  not  citi- 
zens of  the  United  States,  are  taxed  only  on  income  derived  from 
sources  within  this  country. 

Thus,  an  Americgui  residing  in  Mexico  and  earning  his  living 
there  is  taxable,  as  citizens  of  the  United  States  are  taxable  where- 
ever  resident.  So  also,  an  Italian,  residing  here  and  receiving 
all  his  income  from  abroad,  is  tawcable,  as  residents  of  the  United 
States  are  taxable,  regardless  of  source  of  income.  A  Canadian, 
living  in  Canada,  suid  deriving  his  total  income  from  investments 
in  corporations  in  the  United  States,  is  taxable,  as  a  non-resident 
alien  is  taxed  on  income  derived  from  sources  within  the  United 
States.  But,  a  Brazilian,  residing  in  Brazil,  and  representing  an 
American  concern, -e. g. ,  the  U.  S.  Standard  Oil  Co., -and  being  paid 
from  the  United  States,  is  not  tameable,  as  the  income  was  earned 
outside  the  United  States,  and  therefore  is  not  considered  income 
derived  from  sources  within  the  United  States.  So  also,  a  non- 
resident alien,  receiving  dividends  from  an  American  corporation 
which  earned  its  income  entirely  in  foreign  countries,  would  not 
be  taxed.  American  seeunen  and  alien -resident  seamen  engaged  in 
foreign  trade  are  taxable,  but  non-resident  alien  seamen  whether 
on  American  or  foreign  vessels  are  not  taxable,  although  their  ves- 
sels may  stop  at  American  ports  and  part  of  the  income  be  earned 
within  the  United  States. 

Persons  bom  here,  still  subject  to  American  jurisdiction, 
and  not  naturalized  elsewhere,  auid  foreigners  naturalized  here,  are 
citizens  of  the  United  States.  Naturalized  citizens  lose  their 
citizenship  if  they  return  to  their  own  country  for  a  period  of 
two  years  or  any  other  foreign  country  for  a  period  of  five  years. 
Foreigners  who  have  merely  taken  out  their  first  papers  are  not 
considered  naturalized. 

PERSONS  EXEMPT:  The  law  allows  an  exemption  of  $1,000  in  the 
case  of  a  single  person,  and  either  $2,000  or  $2,500  in  the  case 
of  a  married  person  or  head  of  a  family,  before  the  Normal  Tax  is 
levied.  A  further  exemption  of  $400  is  granted  for  dependents 
under  certain  circumstances. 

MARRIED  PERSONS:  For  the  taxable  year  1921,  a  married  person, 
living  with  husband  or  wife,  is  allowed  an  exemption  of  $2,500,  ex- 
cept that  when  the  combined  income  of  both  is  in  excess  of  $5,000, 


an  exemption  of  only  $2,000  is  allowed  even  though  each  submits  a  re- 
turn with  separate  income  of  less  than  $5,000.   Only  one  personal 
exemption  is  allowed  husband  and  wife.   This  exemption,  however,  may 
be  taken  in  any  proportion  desired.  Thus,  if  both  are  employed,  their 
combined  income  may  be  reported  and  one  exemption  of  $2,500  taken;  or 
they  may  report  separately,  one  claiming  an  exemption*  of  $1,500  anci 
the  other  of  $1,000;  or  each  may  claim  $1,250  exemption. 

Husband  and  wife  must  be  living  together,  actually  or  construct- 
ively, in  order  that  the  $2,500  or  $2,000  exemption  may  be  allowed. 
If  the  husband  is  a  traveling  man  and  occasionally  visits  home,  or 
if  the  wife  is  absent  unavoidably  through  illness  or  otherwise  for  a 
long  period,  the  law  considers  the  two  (constructively)  as  living 
together.  But  if  the  husband  or  wife  is  continually  and  voluntarily 
absent  from  home,  or  each  makes  his  or  her  home  at  a  different  place, 
then  neither  one  is  entitled  to  the  exemption  for  married  persons. 


HEAD  OF  A  FAMILY: 
of  a  family  is  allowed 
family  is  a  person  who 
one  or  more  members* of 
marriage,  or  adoption, 
financial  support,  and 


As  in  the  case  of  a  married  person,  the  head 
a  $2,500  or  $2,000  exemption.   The  head  of  a 
(1)  maintains  a  home,  (2)  in  which  he  supports 
a  household  related  to  him  through  blood, 

(3)  to  whom  he  gives  substantially  all 

(4)  who  is  also  under  some  legal  or  moral  ob- 
ligation to  act  as  head.   To  claim  exemption  as  head  of  a  family,  a 
person  must  actually  assume  the  responsibility  of  the  household  and 
the  dependent  must  look  to  him  for  support.   If  two  persons  are  sup- 
porting a  household  on  an  approximately  equal  basis,  neither  can 
claim  exemption  as  head  of  the  family.  However,  if  one  contributes 
substantially  all  the  support,  and  the  dependents  receive  incidental 
incomes,  such  as  bank  interest,  or  interest  on  bonds,  etc.,  he  is 
nevertheless  entitled  to  the  $2,500  or  $2,000  exemption.   If  a  father 
places  his  widowed  child  with  relatives  temporarily,  he  will  still 

be  considered  head  of  a  family,  but  not  if  he  does  so  continually 
and  without  good  reason. 

DEPENDENTS:   An  additional  $400  exemption  is  allowed  a  taxpayer 
(1)  who  gives  chief  support  to  a  dependent  other  than  husband  or 
wife,  (2)  which  dependent  must  be  under  18  years  of  age  or  mentally 
or  physically  incapacitated  for  self-support.   No  special  relation- 
ship is  required.   No  home  need  be  maintained  by  the  taxpayer.   Thus, 
a  philanthropist  supporting  a  needy  person  under  18  may  claim  $400 
additional  exemption.   A  son  forwarding  money  to  an  incapacitated 
mother,  although  not  living  with  her  and  not  head  of  a  family,  may 
claim  the  dependency  exemption.   If  the  dependent  to  whom  support 
is  given  has  sufficient  other  income,  or  is  over  18  and  capable  of 
working,  exemption  is  not  allowed.   "Giving  chief  support"  to  a  per- 
son means  furnishing  over  50%  of  his  support. 

EXEMPTION  DATE:  The  status  of  the  taxpayer  on  the  last  day  of 
his  taxable  year  determines  his  exemption.   The  number  of  dependents 
he  has  at  the  end  of  his  taxable  year- not  throughout  the  year- 
furnishes  the  basis  for  determining  exemption.  Thus,  "A",  married, 
and  earning  $4,800,  is  supporting  four  children  during  the  year.   In 


December,  two  die.  He  is  allowed  $3,300  exemption  at  the  end  of 
the  year,  because  at  that  time  he  was  supporting  a  wife  and  two 
children.  Also,  a  person  married  December  30  is  allowed  $2,500 
exemption  for  the  year.  A  person  divorced  December  1,  if  not 
remarried  within  the  year,  may  claim  only  $1,000  at  the  end  of 
the  year.  Under  this  same  rule,  if  a  person  dies  during  the  year, 
his  status  at  the  time  of  death  determines  his  exemption.   "B", 
married,  and  supporting  two  children  under  18,  dies  April  1,  his 
income  up  to  that  time  being  $4,000.  His  wife  continues  to  support 
the  same  two  children  for  the  remainder  of  the  year  and  earns 
$3,500.   "B"'s  administrator,  in  making  out  "B"'s  tax  return,  is 
entitled  to  take  $3,300  exemption  for  "B"  at  the  time  of  his  death, 
April  1,  which  is  the  end  of  his  taxable  year.   "B"'s  wife  would 
also  be  allowed  $3,300  exemption  December  31,  as  she  was  at  that 
time  head  of  a  faimily  and  supporting  two  dependents,  despite  the 
fact  that  previous  exemptions  were  claimed  for  the  children.  The 
wife  supported  two  dependents,  the  husband  three,  yet  each  received 
the  same  exemption,  because  the  $400  dependency  exemption  is  allowed 
only  for  dependents  other  than  husband  or  wife.   If,  moreover,  "B"'s 
estate  is  still  in  the  process  of  administration  on  December  31, 
an  exemption  of  $1,000  may  be  claimed  for  it  the  same  as  for  an 
individual  taxpayer. 

EXEMPTIONS:  Illustrative  examples.   A  husband  earning  $3,000 
is  supporting  a  wife  and  a  child  under  18  and  is  entitled  to  $2,900 
exemption.   If  the  wife  should  die,  what  would  the  husband's  exemp- 
tion be?  Still  $2,900,  as  he  would  be  head  of  a  family,  and  sup- 
porting a  dependent  other  than  husband  or  wife. 

A  brother  earning  $4,000  lives  with  and  supports  his  sister, 
age  22,  2tnd  able  to  work.  He  is  entitled  to  $2,500  exemption  as 
head  of  a  family,  but  no  dependency  exemption  for  the  sister.   If 
the  sister  receives  $40  in  bank  interest  and  $50  in  dividends  during 
the  year,  will  the  exemption  be  destroyed?  No,  as  such  amounts  are 
considered  "incidental  income".  If  the  sister  is  incapacitated  for 
self-support,  the  brother  is  entitled  to  $2,900  exemption,  as  he  is 
head  of  a  family  auid  supporting  a  dependent. 

« 

If  a  brother  mails  home  the  entire  support  of  an  aged  father 
and  a  sister  over  18,  what  is  his  exemption?  Nothing  as  head  of  a 
family,  nothing  for  the  sister,  $1,000  for  himself  and  $400  for  the 
father;  total  exemption,  $1,400. 

Two  brothers,  earning  $2,000  each,  contribute  respectively  $1,500 
and  $1,600  to  a  home  in  which  they  live  and  are  the  sole  support  of  a 
mother  and  a  sister,  age  15.  What  are  the  exemptions  allowed?  The 
brother  contributing  $1,500  is  entitled  to  a  $1,000  exemption  only;  the 
brother  giving  $1,600  gets  an  exemption  of  $1,400, -$1,000  for  himself, 
$400  for  his  minor  sister,  nothing  for  his  mother.   Neither  is  head  of 
a  family  and  furnishing  substantially  all  support  to  the  members; 
neither  can  claim  exemption  for  the  mother,  as  it  does  not  appear 


that  she  is  incapacitated  for  self-support,  and  only  the  one  con- 
tributing over  50%  of  the  sister's  support  can  claim  the  $400 
additional  exemption. 

Three  brothers  send  home  to  their  mother  $200,  $300,  and  $500 
annually.  What  additional  exemptions  arise?  None,  as  no  one  of 
the  three  brothers  is  giving  over  50%  support  to  the  mother. 

If  a  person  earning  less  than  $5,000  marries  December  30,  and 
is  still  looking  for  a  house  at  the  end  of  the  year,  is  he  entitled 
to  $2,500  exemption?  Yes,  the  fact  that  he  is  married  and  not 
voluntarily  separated  from  his  wife  will  entitle  him  to  the  full 
$2,500. 

A  father  makes  $2,100  a  year  and  his  minor  son,  age  17,  makes 
$500  a  year.  How  should  the  amounts  be  reported?  If  the  minor  son 
is  living  at  home  and  apparently  under  the  guidance  and  control  of 
his  parents,  his  father  should  include  the  $500  with  his  own  income 
and  take  a  dependency  exemption  of  $400  for  the  son.   A  minor  making 
over  $1,000,  and  single,  must  pay  a  tax. 

QUALIFICATION  OF  $2,000.  EXEMPTION:   For  the  years  1918  to  1920 
inclusive,  a  $2,000.  exemption  was  allowed  a  married  person  or  head 
of  a  family;  for  1921  and  subsequent  years  this  exemption  is  $2,500. 
against  net  incomes  up  to  and  including  $5,000.,  and  $2,000.  against 
net  incomes  in  excess  of  $5,000.;  except  that  for  incomes  from 
$5,000.  to  $5,020.  the  tax  is  the  amount  it  would  have  been  if  only 
$5,000.  were  earned,  plus  the  amount  of  the  income  in  excess  of 
$5,000. 

Thus,  if  an  individual  earned  $4,900.  he  would  be  entitled, 
if  married,  to  $2,500.  exemption,  but  if  earning  $5,010.,  he  would 
be  entitled  to  only  $2,000.   Under  the  above  ruling,  an  individual 
making  $5,010.  would  first  compute  the  tax  for  $5,000.  and  apply 
against  the  $5,000.  his  $2,500.  (or  other  exemption,-  such  as 
$2,900.  or  $3,300.  exemption),  leaving  $2,500.  on  which  to  pay  a 
4%  tax,  or  $100.  He  would  then  add  to  this  $100.  the  $10.  made  in 
excess  of  $5,000.,  giving  him  a  tax  of  $110.   This  special  rule 
is  used  for  income  from  $5,000.  to  $5,020.,  but  after  the  latter 
amount  has  been  reached,  then  only  the  $2,000.  exemption  applies. 
Thus, if  an  individual  makes  $5,021.,  and  is  married,  he  will  have 
to  take  an  exemption  of  $2,000.  and  pay  a  4%  tax  on  the  balance. 
The  Surteix  is  computed  the  same  as  ever,  whether  the  taxpayer  is 
entitled  to  Normal  Tax   relief  or  not. 

Resident  aliens,  living  in  this  country,  and  mailing  money  else- 
where, are  entitled  only  to  the  personal  and  dependency  exemptions. 
Thus,  an  Italian  forwarding  $2,600  a  year  to  Italy  to  his  wife  and 
three  children  under  18,  is  entitled  to  $2,200  in  credits,  $1,000 
for  himself,  and  $400  for  each  child,  but  nothing  for  the  wife,  as  he 
is  voluntarily  separated  from  her. 


Returns  must  be  filed  by  all  married  persons  having  a  net  in- 
come in  excess  of  $2,000,  and  by  all  single  persons  with  net  incomes 
in  excess  of  $1,000;  also  by  all  persons  with  gross  incomes  in  ex- 
cess of  $5,000.   If  the  combined  gross  income  of  husband  and  wife 
is  in  excess  of  $5,000.  a  return  must  be  filed.   Gross  income  means 
gross  profit  on  Sales  in  a  business,  plus  income  from  other  taxable 
sources.  Exemptions  must  be  proved.  Thus,  a  married  man  making 
$2,600,  and  supporting  a  wife  and  two  children  under  18  years  of 
age,  is  entitled  to  $3,300  exemption,  but  must  file  a  return, 
claiming  and  proving  his  exemption. 

INCOME  TAXABLE:   The  taxes  are  levied  against  net  income,  'which 
is  gross  income  less  allowable  deductions.  GROSS  INCOME  includes 
items  of  income  from  all  sources  whatsoever,  except  those  specifi- 
cally enumerated  under  exclusions.  EXCLUSIONS  are  income  items 
which  of  their  nature  are  excluded  for  tax  purposes,  such  as 
salaries  received  from  the  State.  DEDUCTIONS  are  those  items  in- 
cluded in  gross  income,  which  are  deducted  to  obtain  net  income, 
such  as  general  business  expenses.  NET  INCOME  therefore  equals 
gross  income  (omitting  specific  exclusions)  less  allowable  deduc- 
tions.  CREDITS  are  items  deducted  from  net  income  to  obtain  tax- 
able income  for  purposes  of  the  Normal  Tax,  such  as  the  $2,500 
exemption  for  a  married  man.  The  NORMAL  TAX  is  levied  against  NET 
INCOME  LESS  CREDITS,  the  SURTAX  against  NET  INCOME. 

To  illustrate:  "A"  receives  a  salary  of  $3,000  as  Attorney 
for  the  State.  As  a  practicing  lawyer  he  receives  fees  for  the 
year  amounting  to  $8,600,  but  his  office  and  other  business  ex- 
penses are  $2,400.  He  is  married.  His  total  income  is  $11,600, 
but  his  gross  income  is  only  $8,600,  as  the  State  salary  is  grouped 
under  exclusions  for  purposes  of  the  tax  and  not  reported  in  the 
gross  income.  From  his  $8,600  gross  income  he  may  subtract  $2,400, 
as  this  item  represents  allowable  deductions,  giving  him  $6,200  as 
net  income.   The  Surtax  is  levied  against  his  net  income,  $6,200. 
He  is  now  allowed  a  credit  or  exemption  of  $2,000  as  a  married  man, 
which  is  subtracted  from  the  net  income  of  $6,200,  giving  $4,200- 
or  net  income  less  credits— and  the  Normal  Tax  is  applied  against 
the  $4,200.  Thus: 

Total  Income ^-''i'oSS 

State  Salary  deducted  as  it  comes  under  exclusions 5,000 

Gross  Income ^o '  5nn 

Allowable  deductions  subtracted ^^'^QQ 

Net  Income,  which  is  gross  income  less  deductions 6,200 

Credits  or  exemptions-married  man  ^>00Q 

Net  Income  less  credits ^^'  200 

The  Surtax  is  now  levied  against  the  $6,200  and  the  Normal 
Tax  against  $4,200. 


-7- 


LECTURE  1. 


Questions  to  be  answered. 


1.  (a)  Name  the  two  taxes  levied  against  individuals. 

(b)  State  the  exemption  allowed  a  single  person,  an  estate 
in  process  of  administration,  a  married  person,  and  the  head  of  a 
family. 

(c)  Name  the  conditions  under  which  an  additional  exemp- 
tion for  supporting  a  dependent  is  allowed  a  taxpayer. 

2.  (a)  Distinguish  between  gross  income,  exclusions  from  gross 
income,  allowable  deductions,  net  income  and  exemptions. 


Tax  Laws: 


(b)  State  which  of  the  following  are  subject  to  the  Income 

(1)  United  States  citizen  living  in  Canada,  earning 
his  living  there. 

(2)  Canadian  citizen  working  in  the  United  States. 

(3)  English  citizen,  living  in  England,  with  income 
from  investments  in  this  country. 

(4)  Italian  citizen,  naturalized  here,  who  returned 
to  Italy  last  year,  and  who  is  now  earning  his 
living  there. 

3.  (a)  An  individual  with  income  of  $4,800  supports  in  his 
own  home  his  mother,  wife,  and  child,  age  12,  also  an  adopted 
child,  age  10,  and  his  own  brother,  age  20,  temporarily  unem- 
ployed. State  his  exemption. 

(b)  A  taxpayer,  divorced,  earning  $6,000,  forwards  $50  a 
week  to  his  former  wife  and  two  children  under  18.   State  his 
exemption. 

(c)  A  taxpayer,  widow,  with  income  of  $3,000,  is  living 
with  relatives,  while  her  only  daughter,  age  19,  is  completing 
finishing  school,  following  which  the  mother  contemplates  keeping 
a  home  of  her  own.  State  her  exemption. 

4.  Compute  the  tax  of  a  married  person  living  with  wife, 
in  each  of  the  following  cases: 

(a)  Income  of  $4,990. 

(b)  Income  of  $5,010. 

(c)  Income  of  $5,025. 

(d)  Income  of  $10,000. 


-8- 


LECTURE  2 . 

EXCLUSIONS  FROM  GROSS  INCOME. 

Items  Excluded  by  Law. 

Other  Income  Items  Excluded. 

Liberty  Bond  Interest  Excluded. 

ITEMS  EXCLUDED  BY  LAW:   The  following  twelve  groups  of  items 
are  specifically  excluded  from  Gross  Income  by  the  new  1921  Revenue 

Act : 

1.  Proceeds  of  life  insurance  policies  paid  to  beneficiaries 

or  estates  upon  the  death  of  the  insured. 

2.  Amounts  received  by  the  insured  himself  as  a  RETURN  or 

premiums  paid  out.  „,,^«„ 

3.  The  value  of  property  acquired  by  GIFT,  BEQUEST,  DEVISE, 

or  DESCENT. 

4  .  Interest  upon  State  obligations  and  certain  obligations 

of  the  Federal  Government  and  its  Agencies. 

5.  Incomes  received  by  foreign  governments  from  investments 
in  bonds,  stocks,  domestic  securities,  etc.,  in  this  country. 

6.  Amounts  received  through  health  and  accident  insurance, 
workmen's  compensation  acts,  etc.,  because  of  injury  or  sickness. 

7.  Incomes  of  States  and  subdivisions  thereof  from  public 

utilities. 

8.  Income  received  by  non-resident  aliens  or  foreign  corpo- 
rations from  operating  ships.  ,^   .  .    _ 

9.  Amounts  received  under  the  War  Risk  Insurance  or  Vocational 

Rehabilitation  Acts.  ^      ,    x-   r.  -i^ 

10.  The  first  $300  received  by  a  member  from  a  domestic  buila- 
ing  and  loan  association  for  the  period  December  31,  1921,  to  Jan- 
uary 1,  1927.  ^   .  ^  o   .    4.   « 

11.  The  rental  value  of  dwelling  property  furnished  ministers 

of  the  Gospel.  _     ^  .  .    x 

12.  Receipts  of  ship  owners'  mutual  protective  and  indemnity 

associations. 

EXPLANATION  OF  ITEMS  EXCLUDED  BY  LAW:   The  foregoing  groups 
in  detail  cover  the  following  exclusions:  -xu   x 

GROUP  1.   Proceeds  of  life  insurance  policies  going  either  to 
the  insured's  individual  beneficiaries,  an  estate,  in  trust,  or  to 
a  partnership,  are  not  taxable,  whether  received  in  annual  install- 
ments or  a  single  payment.  . 

Illustrations:  (a)  "A"  dies,  his  wife  receiving  $10,000  insur- 
ance; the  amount  is  not  taxable,   (b)  "C"  dies;  "B",  his  wife  was 
given  3%  of  the  principal  of  his  policy  annually  with  interest;  D 
a  son,  receiving  the  balance  upon  "B"'s  death.  Neither  "B"  nor  "D" 
is  taxable  on  the  proceeds,   (c)  "E"  is  a  beneficiary  in  a  policy 
which  provides  for  annual  installment  payments  and  dividends  during 
the  beneficiary's  life;  "E"  is  not  taxable,  the  amounts  being  "pro- 
ceeds of  a  life  insurance  policy",   (d)  Where,  however,  "F"  had 
the  option  of  receiving  the  face  value  of  a  policy,  or  leaving  the 


-9- 

amount  with  an  insurance  company  to  draw  interest  annually  and 
elected  the  latter  course,  it  was  held  (Gov.  Decision)  that  the 
interest  was  taxable,  as  it  was  not  the  "Proceeds  of  a  life  insur- 
ance policy",  but  a  return  from  the  proceeds  re -invested. 

GROUP  2.   Amounts  received  by  the  insured  during  the  term  of 
a  policy,  at  maturity,  or  upon  surrender,  which  can  be  construed 
as  a  return  of  premiums  paid  by  him,  are  not  taxable. 

Illustrations:  Dividends  upon  unmatured  life  insurance  or 
endowment  policies,  or  from  annuity  contracts,  are  not  taxable, 
whether  received  in  cash  or  used  to  reduce  future  premium  pay- 
ments.  Dividends  from  paid-up  policies  are  taxable.   The  former 
^^^^^P^^^   return  of  premiums  paid  by  the  insured;  the  latter  a 
profit,  leaving  the  principal,  created  through  premiums,  still 
intact  and  returnable.  Amounts  received,  representing  interest 
are  taxable. 

GROUP  3.  Money  or  personal  or  real  property  received  as  a 
gift,  under  a  will,  or  through  statutes  of  descent,  is  not  taxa- 
ble income.  The  income  derived  therefrom  is.  A  gift  should  not 
contain  the  element  of  compensation. 

e.n  ^Jll^st rations:  (a)  "A",  through  a  will,  is  left  a  house  worth 
»10,000,  the  annual  rent  income  from  which  is  $2,000.   The  rent  only 
is  taxable.   "A"  sells  the  house  at  a  profit  of  $3,000.  The  $3  000 
is  taxable  income,   (b)  "B"  owes  "C"  $500.   "C"  cancels  the  debt; 
this  IS  a  gift  to  "B"  and  not  taxable  income.   If  "B"  did  some  work 
for  '  C"  then  the  cancellation  would  be  compensation  for  services 
rendered  and  taxable. 

Pensions  as  awards  from  former  employers  are  taxable,  other- 
wise not.  The  Federal  Government  gives  pensions  to  its  aged  em- 
ployees, the  Carnegie  Foundation  to  certain  retired  teachers;  the 
former  are  taxable,  the  latter  not,  being  considered  gifts.  Like- 
wise, a  so-called  Christmas  gift  or  annual  bonus  received  from  a 
corporation  by  an  employee  or  officer  is  taxable,  even  if  the  re- 
cipient IS  no  longer  employed.  An  amount  paid  under  a  marriage 
settlement  is  a  gift.  Alimony  is  not  taxed,  nor  allowances  received 
based  on  a  legal  separation. 

GROUP  4:   Interest  upon  bonds  of  a  State,  county,  city,  town 
or  any  political  subdivision  of  a  State,  such  as  road,  water,  gas' 
drainage,  irrigation,  school  or  harbor  district,  is  exempt,  also  ' 
interest  from  bonds  of  Federal  Farm  Loan  Associations  and  Federal 
Land  Banks.   Dividends  of  Federal  Land  Banks  and  Federal  Reserve 
Banks  are  exempt.  Dividends  of  member  banks  of  the  Federal  Re- 
serve System  are  taxable.  All  these  banks  may  be  taxed  for  real 
property  owned.   If  a  corporation  issues  bonds  secured  by  proper- 
ty, and  the  State  purchases  the  property,  the  bonds  do  not  be- 
come State  bonds. 

Interest  upon  bonds  of  the  Federal  Government  or  its  possess- 
ions, also  the  District  of  Columbia,  is  exempt  ordinarily,  except 
that  interest  on  Federal  obligations  issued  after  Sept.  1,  1917 


-10- 

is  exempt  only  as  specified  in  the  respective  loan  acts.   There- 
fore, exemptions  on  Liberty  Bonds  issued  after  Sept.  1,  1917, 
War  Saving  Certificates,  Treasury  Certificates  of  Indebtedness, 
and  bonds  of  the  War  Finance  Corporation  are  exempt  only  as  speci- 
fied in  the  respective  loan  acts,  as  changed  and  approved  by 
Congress  from  time  to  time.  (See  part  2  of  this  lecture  for  Liberty 
Bond  Exemptions  for  1920  and  1921).  Interest  from  Postal  Savings 
Deposits  made  prior  to  September  1,  1917  is  exempt. 

GROUP  5.   Income  received  by  foreign  governments,  or  indepen- 
dent subdivisions  thereof,  from  investments  in  this  country,  is 
exempt.  Income  received  by  foreign  ambassadors  from  stock  and  bond 
investments  here  or  from  bank  deposits  is  exempt,  but  not  profits 
from  a  business  carried  on  by  such  ambassadors  in  the  United 
States.  American  ambassadors  to  foreign  countries  are  taxable  on 
all  their  income,  also  Americans  employed  by  foreign  ambassadors. 
If  foreign  governments  receive  money  from  individuals  and  reinvest 
it  in  this  country,  the  income  therefrom  is  taxable. 

GROUP  6.  Amounts  received  through  accident  and  health  in- 
surance, from  workmen's  compensation  acts,  and  from  law  suits  and 
agreements  on  account  of  injuries  or  sickness,  are  not  taxable, 
whether  received  by  the  individual  injured,  or  his  beneficiaries 
or  estate. 

Illustrations:  (a)  "A"  is  injured,  and  by  State  Law,  his  em- 
ployers pay  him  one -half  his  former  income  for  a  period  of  six 
months.   The  amount  thus  received  is  exempt,   (b)  "B"  is  injured 
in  an  automobile  accident,  and  disabled  for  four  months.  By  legal 
agreement,  "B"  received  $2,000  in  lieu  of  trying  the  case  in 
court.  The  amount  is  exempt.  However,  by  Government  Decisions, 
it  has  been  held  that  an  amount  received  through  legal  suit  be- 
cause of  alienation  of  affections,  or  because  of  breach  of  promise, 
would  be  taxable,  as  the  income  is  not  from  personal  injury  or 
sickness,  as  defined  by  the  law. 

GROUP  7.   Incomes  of  States  and  political  subdivisions  there- 
of, from  public  utilities  and  other  sources,  are  not  taxable.   If 
a  contractor  operates  a  public  utility  giving  part  of  the  profit 
to  the  State,  he  may  deduct  the  amount  as  expense,  the  balance 
retained  by  himself  being  tameable. 

GROUP  8.   Incomes  of  non-resident  aliens  or  foreign  corpora- 
tions earned  exclusively  from  operating  foreign  ships  will  be 
exempt  if  the  countries  under  the  laws  of  which  they  are  operating 
permit  similar  exemptions  to  American  citizens  and  corporations 
operating  vessels. 

GROUP  9.  Any  amounts  received  under  the  War  Risk  Insurance 
or  Vocational  Rehabilitation  Acts,  or  as  pensions  from  the  Feder- 
al Government  for  active  military  services  in  time  of  war  are  not 
taxed.  Previous  to  the  passage  of  the  1921  Revenue  Act  amounts 
received  under  the  War  Risk  Insurance  Act  were  declared,  under  date 


-11- 

of  June  25,  1918,  not  to  be  taxable;  but  by  government  decision 
amounts  going  to  Vocational  Rehabilitation  students  had  formerly  been 
declared  taxable.  Any  pension  received  by  a  soldier  or  sailor  from 
either  the  Federal  or  State  Government  has  been  declared  exempt. 

GROUP  10.    If  Domestic  Building  and  Loan  Associations  are 
operated  exclusively  for  the  purpose  of  making  loans  to  members, 
then  the  first  $300  received  for  the  years  1922  to  1926  inclusive 
will  not  be  taxed. 

GROUP  11.    The  rental  value  of  dwelling  property  furnished 
ministers  of  *the  gospel  is  not  taxable  income  starting  with  the  year 
1921.  Heretofore  such  individual  reported  as  taxable  income  salary 
received  and  the  cash  equivalent  value  of  board  and  room  furnished. 

GROUP  12.    Shipowners'  Mutual  Protective  and  Indemnity  Asso- 
ciations do  not  pay  any  taxes  on  receipts  if  any  profits  arising 
do  not  inure  to  the  benefit  of  individual  stockholders.   However, 
these  Associations  are  taxed  on  income  such  as  interest,  dividends, 
and  rents  received. 

Heretofore  military  salaries  up  to  $3500  received  from  the 
Federal  Government  by  persons  in  active  military  service  during  the 
last  war  have  been  exempt.  By  act  of  Congress  such  salaries  were 
exempt  only  up  to  March  3,  1921.   Apparently  from  the  new  law  they 
are  taxable  for  the  whole  year  1921  as  they  are  no  longer  grouped 
under  exclusions  from  gross  income. 

In  addition  to  the  foregoing  twelve  groups  of  exclusions,  a 
few  other  items  are  not  taxable. 

By  Supreme  Court  decision,  stock  dividends  received  are  ex- 
empt from  taxation,  although  profit  on  the  sale  of  them  is  not. 
Income  earned  or  accrued  before  March  1,  1913,  and  realized  or  re- 
ceived thereafter  is  exempt.  Thus,  a  person  owning  real  estate 
which  cost  him  $100,000  in  1910  and  sold  for  $175,000  in  1920, 
might  show  that  part  of  the  increase  in  value  occurred  before 
March  1,  1913,  in  which  case  he  pays  a  tax  only  on  the  profit  ac- 
cruing from  that  time  to  date  of  sale.   (Decisions  on  this  point 
will  be  considered  later).   Amounts  credited  to  a  person's  account 
without  giving  him  unrestricted  claim  thereto,  are  not  taxable. 
Thus,  a  corporation  gives  an  officer  ten  shares  of  stock,  provi- 
ded he  will  remain  three  more  years  with  the  company.  As  the 
officer  has  not  full  title  to  the  stock  it  is  not  taxable  income. 
Interest  on  Liberty  Bonds,  also  cash  dividends  received,  are  sub- 
ject to  the  Surt2txes  only,  being  exempt  from  Normal  Taxes. 

No  tax  is  levied  on  the  profits  from  the  sale  of  vessels 
built  prior  to  Jan.  1,  1914,  if  the  total  money  received  there- 
from is  reinvested  in  vessels  approved  by  the  U.  S.  Shipping 
Board. 

Partnerships,  as  such,  pay  no  income  taxes,  but  submit  re- 
turns of  information.  The  partners  pay  on  their  respective 
shares  of  partnership  profits,  whether  received  or  not. 


-12- 

Compensation  paid  by  States  or  subdivisions  thereof  is  not 
specifically  exempt  by  Law,  but  is  nevertheless  not  taxable,  be- 
cause the  Federal  Government,  through  constitutional  limitations, 
may  not  interfere  with  the  operations  of  the  several  States. 
Therefore,  salaries  and  compensation  received  by  employees  of  a 
State  itself  or  city,  county,  town,  or  other  subdivision  of  a 
State,  are  exempt.  Salaries  of  State  and  city  civil-service  em- 
ployees, political  appointees,  etc.,  are  not  taxable  on  account  of 
this  limitation.  However,  if  a  person  is  employed  only  occasion- 
ally or  temporarily  by  a  State  or  city,  as  an  attorney  to  fight  a 
particular  case,  or  a  contractor  to  build  a  road,  the  amount  re- 
ceived is  tajcable.   The  test  to  determine  taxability  appears  to  be 
as  follows:  If  the  person  receiving  the  income  from  the  State  is 
acting  in  the  capacity  of  an  independent  contractor  with  the  Gov- 
ernment, then  the  profit  received  is  taxable.   Thus,  a  person  mak- 
ing a  profit  through  erecting  a  public  building  is  not  exempt;  he 
has  contracted  with  the  State  the  same  as  with  any  other  client, 
suid  the  income  is  subject  to  the  Federal  Taxes.  Notary  public  fees 
received  are  not  taxable;  fees  of  receivers  appointed  by  State 
Courts  are  also  exempt.   College  professors  receiving  salaries 
under  the  Smith-Lever  Act  are  exempt.   Through  this  Act,  Federal 
funds  are  donated  to  States,  for  the  purpose  of  defraying  expenses 
of  certain  State  colleges.  As  the  funds  are  mixed  with  State 
monies,  losing  their  identity,  salaries  received  thereunder  are 
considered  income  from  States. 

Under  the  1921  Act,  when  property  is  exchanged,  it  may  be 
possible  that  there  is  no  tameable  gain  resulting  therefrom.   The 
rule  under  the  1918  Act  was  as  follows:  Wherever  property  was  ex- 
changed, the  market  value  of  the  property  was  used  as  the  basis 
for  determining  loss  or  gain.  Thus,  if  stock  was  acquired  in  1915 
and  was  exchanged  for  real  estate  in  1920,  and  neither  the  stock 
nor  real  estate  had  any  readily  realizable  value,  each  party  to 
the  transaction  would  have  to  obtain  the  market  value  as  well  as 
possible  under  the  circumstances,  and  report  any  gain  or  loss  from 
the  transaction,  based  on  the  cost  of  the  property  to  each  party 
and  the  market  value  of  each  kind  of  property  in  1920.   The  new  Law 
states  that  no  loss  or  gain  is  to  be  reported  in  exchange  of  prop- 
erty hereafter  in  the  following  cases:  (1)  where  the  property  ex- 
changed has  no  readily  realizable  market,  and  (2)  where  it  may 
possibly  have  a  readily  realizable  market  but  the  following  facts 
exist:  (a)  where  property  held  for  investment  purposes  or  for  pro- 
duction is  exchanged  for  property  of  like  use  and  kind;  (b)  where 
stock  held  by  an  individual  is  exchanged  for  stock  resulting  from 
a  merger,  consolidation,  reorganization,  change  in  identity  form, 
etc.;  (c)  where  an  individual  or  two  or  more  persons  exchange  prop- 
erty for  stock  in  a  corporation  and  thereafter  control  80%  of  the 
voting  stock  or  ownership  stock  of  the  corporation.   (See  1921  Act- 
Sec.  202). 


Lecture  II,  Part  2 


INTEREST  ON  LIBERTY  BONDS 


Interest  received  on  Liberty  Bonds  is  subject  to  different 
exemptions  for  the  years  1920  and  1921.  For  those  reporting  on 
a  fiscal-year  basis,  it  will  be  necessary  to  understand  the  ex- 
emptions for  both  years;  for  those  reporting  on  a  calendar-year 
basis  it  will  be  necessary  only  to  understand  the  exemptions 
for  the  year  1921. 

For  the  year  1921,  interest  on  Liberty  Bonds  as  previously 
explained  is  exempt  from  all  Normal  Taxes.  Interest  on  the 
First  issue  of  Liberty  Bonds  and  on  the  3f  Fifth  issue  is  ex- 
empt from  Surtaxes.   Interest  received  from  the  4f  Fifth  issue 
of  Liberty  Bonds  is  subject  to  Surtaxes.  Interest  received  on 
Second,  Third  and  Fourth  issues.  Original  or  Converted,  is  exempt 
to  the  extent  of  the  first  $5000  of  principal  amounts  owned.  Also 
there  is  a  general  exemption  of  the  Seconds,  Thirds,  and  Fourths, 
Original  or  Converted,-  called  4's  and  4^'s,-  to  the  extent  of 
$125,000  of  principal  amounts  owned.  There  is  also  an  exemption 
of  First  Liberty  Bonds  originally  converted  into  Fourth  Liberty 
Bonds  to  the  extent  of  $30,000. 

Summarized,  these  exemptions  for  1921  are  as  follows:  all  five 
issues  free  from  Normal  Tax;  First  Issue,  3|,  no  Surtax;  Fifth 
Issue,  3-1 ,  no  Surtax;  Fifth  Issue,  4f,  always  a  Surtax  if  the  tax- 
payer is  in  the  Surtax  class,  plus  the  following  exemptions  of 
Second  4's,  Third  4:|-'s  and  Fourth  4^'s,  original  or  converted, 
before  the  Surtax  is  effective;  $5,000.  in  general  (which  exemp- 
tion may  extend  to  include  War  Savings  Certificate,  U.  S.  Certifi- 
cates of  Indebtedness,  etc.).  $125,000.  in  general;  $30,000.   First 
3-|-'s  transferred  in  Fourth  4:^'s  (called  First  Second  4:|-'s). 

For  the  year  1920,  the  same  total  exemptions  against  the  same 
issues  exist,  but  they  are  arranged  in  more  complicated  form  and 
are  allowed  in  some  cases  only  under  certain  circumstances.   It  is 
not  advisable  to  study  these,  unless  the  reader  wishes  to  know  ac- 
curately the  exact  title  of  the  bond  issues,  and  finds  it  necessary 
to  write  fiscal  year  returns  for  1920-1921.   The  information  on  the 
next  four  pages  is  placed  here  chiefly  for  reference  and  study 
purposes. 

For  the  year  1920  Liberty  Bond  exemptions  are  as  follows:  As 
previously  explained.  Interest  on  Federal  obligations  issued  after 
Sept.  1,  1917,  is  exempt  from  taxes  under  the  old  law  only  as  spec- 
ified in  the  respective  loan  acts.  As  there  were  five  issues  of 
Liberty  Bonds,  four  after  the  above  date,  special  attention  must 
first  be  given  to  the  various  exemption  clauses.  The  five  original 
issues  of  Liberty  Bonds  are  known  by  the  following  titles:  First 


-14- 

Si's,  Second  4's,  Third  4i's,  Fourth  4i's,  Fifth  3f' s,  and  Fifth 
4-|'s.   Certain  of  the  earlier  issues  were  changed  into  later  ones, 
as  their  special  titles  designate.   Thus,  a  First  3^   transferred 
into  a  Second  4,  is  called  First  4,  a  First  3^   transferred  into  a 
Third  4^  is  called  First  4^;  also  a  Second  4,  transferred  into  a 
Third  4^  is  designated  Second  4\,   a  First  3^   transferred  into  a 
Fourth  4^  is  called  First  Second  4^,   etc.   For  purpose  of  exemp- 
tion, the  ultimate  denomination  governs.   Thus,  a  First  3^   converted 
into  a  Third  4\,   with  a  title  -  First  4^,   is,  for  exemption  purposes, 
considered  a  Third  4^,  or  a  Third  Liberty  Loan  Bond,  instead  of  a 
First. 

With  the  foregoing  as  a  basis.  Liberty  Bond  Exemptions  for  1920 
may  be  summarized  as  follows:   All  five  issues  of  Liberty  Bonds  are 
free  from  the  Normal  Tax.   Interest  on  bonds  of  the  First  3^   Issue 
and  the  Fifth  3f  Issue  is  exempt  from  the  Surtaxes  also.   Interest 
on  bonds  of  the  Fifth  4f  Issue  (Victory  Notes)  is  always  taxable 
under  the  Surtax,  if  the  taxpayer  is  in  the  Surtax  class.  There 
remains  the  interest  on  Second,  Third  and  Fourth  Issues  (Original 
or  Converted)  to  consider,  called  4  and  4\  bonds. 

The  interest  on  the  first  $5,000  of  any  or  all  of  these  three 
issues  is  exempt,  plus  $30,000  additional,  giving  a  total  general 
exemption  of  $35,000  on  principal  amounts  of  Seconds,  Thirds,  and 
Fourths,  owned.  There  is  also  a  specific  exemption  of  $30,000 
worth  of  Fourths  alone,  and  of  $30,000  in  principal  of  Firsts  trans- 
ferred into  Fourths  (Called  First  Second  4^).     In  addition,  there 
is  an  exemption  of  Seconds  and  Thirds  not  to  exceed  one  and  one- 
half  times  the  Fourths  originally  subscribed  for  and  still  owned  and 
not  to  exceed  $45,000.  Finally,  there  is  an  exemption  of  Seconds, 
Thirds,  and  Fourths,  otherwise  taxable,  not  to  exceed  three  times 
the  Fifths  (both  issues)  originally  subscribed  for  and  still  held 
emd  not  to  exceed  $20,000. 

Summarized  in  tabular  form,  these  exemptions  are  as  follows: 
All  five  issues  free  from  Normal  Tax. 
First  Issue,  3i,  No  Surtax. 
Fifth  Issue,  3|,  No  Surtax. 

Fifth  Issue,  4f,  Surtax,  if  Taxpayer  is  in  Surtax  Class. 
Plus  the  following  maximum  exemptions  of  Seconds,  Thirds, 
and  Fourths,  Original  or  Converted,  before  the  Surtax  is  effective. 

$5,000.   In  general.   (Including  War-Saving  Certificates, 
Treasury  Certificates  of  Indebtedness,  etc.) 
$30,000.   In  general. 
$30,000.   Fourths. 

$30,000.   Firsts  transferred  into  Fourths.   (First  Second  4^) . 
$45,000.   Seconds  and  Thirds,  not  to  exceed  1^   times  Fourths 
originally  subscribed  for  and  still  held. 

$20,000.   Seconds,  Thirds,  and  Fourths,  not  to  exceed  3  times 
Fifths  originally  subscribed  for  and  still  owned. 

$160,000.  Maximum  exemption  of  Principal  Amounts  of  Seconds, 
Thirds,  and  Fourths,  under  conditions  specified. 


-15- 


For  both  the  years  1920  and  1921,  the  $5,000  exemption  applies 
also  to  obligations  other  than  Liberty  Bonds. 

The  foregoing  exemptions  apply  alike  to  individuals  and  corpo- 
rations for  amounts  owned,  an  individual  paying  a  Surtax  and  a  cor- 
poration an  Excess  Profits  Tax  on  any  taxable  interest.  As  a  cor- 
poration pays  only  an  Excess  Profits  Tax  on  Liberty  Bond  Interest 
and  there  is  no  such  tax  for  1922,  a  corporation  apparently  will 
hold  such  bonds  free  of  taxes  after  Dec.  31,  1921. 

For  both  the  years  1920  and  1921,  if  a  trustee  holds  Liberty 
Bonds,  and  the  income  therefrom  is  distributed  periodically  to  bene- 
ficiaries, then  each  beneficiary  is  considered  as  owning  a  propor- 
tionate share  of  the  bonds  for  purposes  of  exemption.   If  a  trustee 
purchased  Fourths  and  Fifths  during  the  original  drives,  then  the 
beneficiaries  may  also  claim  exemption  under  the  last  two  groups 
above  named  ($45,000  and  $20,000  groups).  When  a  beneficiary  is 
undetermined  or  unborn,  a  trustee  may  take   the  same  exemptions  as 
an  individual  against  amounts  owned. 

Individual  members  of  a  partnership  or  personal-service  cor- 
poration are  considered  as  owning  proportionate  shares  of  a  firm's 
Liberty  Bonds  for  purposes  of  exemption,  so  that,  if  a  firm  pur- 
chased Fourths  and  Fifths  during  the  original  drives,  and  the  pres- 
ent individual  partners  or  stockholders  were  then  members,  they  are 
entitled  to  the  exemptions  in  the  last  two  groups  above  named 
($45,000.  and  $20,000.  groups),  in  addition  to  all  other  exemptions 

Interest  on  the  first  $5,000.  of  5%  War  Finance  Corporation 
Bonds  is  not  taxable. 

Although  income  on  Liberty  Bonds  may  usually  be  exempt,  yet 
complete  information  concerning  Taxable  and  Non-Taxable  Liberty 
Bond  Interest  is  necessary  on  individual  and  corporation  income  tax 
reports.  A  special  Liberty  Bond  Schedule  appears  on  Page  1  of  the 
Individual  Income  Tax  Return  for  1920,  while  a  special  form,  called 
"Schedule  of  Taxable  Interest  on  Liberty  Bonds"  is  used  with  Corpo- 
ration Returns.  A  copy  of  the  latter,  together  with  an  illustra- 
tive problem,  appears  on  page  16  of  this  Lecture. 


Form  lias.— UKITED  STATES  INTERNAL  REVENUE  SERVICE 

SCHEDULE  OF  TAXABLE  INTEREST  ON  LIBERTY  BONDS 

(To  b*  flUd  vMi  tlM  Collwrter  of  latwaal  lUvMUM  with  Form  1120  and  Form  1121) 

For  Calendar  Year  1920 


Of  fbf  p6iiod  bcgmi 
Name  of  Corporation 
Address 


^^  19.^Q,  and  ended 


.lLe.afirol3_er...2L ,  i9.aQ, 


L&ttg-.  Uanuf  aatur  Ing  --CQirip.aiiy- 


1.0bUg». 


(«) 


$....AQD 


(6)  Avcngt 


XxzMmoRS: 
(e)    15,000. 

id)  $20,000. 

(«)  $30,000. 

(/)  $45,000. 

(g)  $30,000. 

(h)  $30,000. 

(t)    $5,000. 

0*)  Priicipal 
■  occss  tf 


2.  First  4's,  and 
8ecaiMl4's. 


IQOQQ 


<t)f>aUi 


Z  X  zz  z 


z  z  z  zz 


z  z  z  z  z 


0.0$ JL9Q1. 


00 


3.  Plrst  4J's, 

Steond  4i's,  uid 

Third  4i's. 


Maoa 


35  $148.7. 


8.4350.0.0. 


MQQ 


392 


.M 


ZZ 


zz 


zz 


24 


.448.0a.  .24 


z  z  z  X  ::  s  s 


z  z  z  zz  z  z 


z  z  z  z  z  z  z 


.3.3$ 


ZZ 


zz 


.Q 


4.  First  SeooBd 

4*8. 


Z  X  s  z  z 


=<  3OQ0O- 


z  z  z  z  z 


Z  Z  Z  X  z 


.sooo. 


.Q|$...212.. 


50 


00 


8.  Fourth  4^*8. 


..9.0000 


ZZ 

aa 

zr 
xz 


QQ 


50 


2.0000 

__a.QQ0.O 

Z  Z  Z  Z  Z  Z  X 
Z  Z  Z  Z  Z  X  z 

soooa 

Z  Z  Z  Z  X  X  zf 


« %  other 

Obligations  issued 
since  Sept.  1, 1917. 


7.  Victory  4J's. 


-Q.Qs 2-7d-Qds 9.8. 

.00 


.JLQQ.0.0. 


.jQC 
.00 


xz 


zx 


OC 


zz 


OC 


.6.QQ0..Q.Q. Lafi2 

&O.Qtl.i)C 


X  X  X  X  Z  X  X 


Z  Z  X  X  Z  X  X 


Z  Z  Z  Z  X  Z  X 


Z  Z  Z  X  X  X  X 


z  zzz  z  z  z 


Z  Z  Z  Z  Z  X  X 


$ 485.  ..0.0$. 


.10-00 


xz 


XX 


XX 


XX 


XX 


XX 


X  X  X  X  X  z  z 


X  Z  X  X  X  X  X 


X  X  X  X  X  X  X 


X  Z  X  X  X  X  X 


Z  X  Z  Z  Z  X  z 


Z  X  Z  Z  Z  X  X 


Z  X  X  X  X  z  z 


8.  War  Finance 
Corporation 
5%  Bonds. 


.45  $....400. 


..7.-^  ...aODQ. 


DO 


.iafi2. 


.4^.00 


$.. 


aa 


zx 

XX 

xz 
xz 
zz 
zz 
zz 


.0.0 


Z  X  X  X  z 


Z  Z  X  z  z 


Z  X  z  z  z 


X  z  z  z  z 


Z  Z  Z  X  z 


Z  X  Z  X  z 


...5.0.00 


00 


Mi 


$...150. 


XX 


xz 


zz 


zz 


xz 


zz 


.00 


(D  Total  taxable  interest  aa  computed  on  line  (k)  above  (enter  on  Fonn  1120,  page  1,  in  Schedule  A.  as  Item  4)     $1312  j31 

INSTRUCTIONS  ""^  '  ~" 


ObU^ations  subject  to  taxation.— The  interest  ou  the  obliga- 
tiona  roecified  in  the  table  above  is  subject  to  excew  profits  tax 
only  to  the  extent  that  the  holdings  exceed  the  exemptions  pro- 
vided by  the  act  authorizing  the  issue  and  subsequent  acts. 

The  diort  titles  for  the  taxable  obligations  are  used  in  thw 
table  The  official  titles,  dates  of  issue,  and  interest  dates  of  the 
Liberty  Bondsand  Victory  Notee  are  given  at  the  foot  of  the  page. 

Compiitation  of  interest— To  determine  the  interest  on  any 
class  of  obligations  received  during  the  taxable  period,  where 
the  books  are  kept  on  a  cash  receipts  and  disbursements  basis, 
add  to  the  amount  of  all  coupons  and  registered  bond  inters^ 
falling  due  within  the  taxable  period  the  amount  of  accrued 
interest  received  on  salea  of  obligations  between  interest  pay- 
ment dates,  and  deduct  from  this  sum  the  accrued  interest  paid 
on  purchasee  of  obligations  between  interest  payment  dates. 
This  method  will  be  followed  where  books  are  kept  on  a  cash 
hasis.  whether  or  not  the  coupons  falling  due  within  the  taxable 
penod  are  actually  c«dhed. 

If  the  books  are  kept  on  the  accrual  basis,  report  the  actual 
amount  oi  interest  accrued  on  the  obligations  held  during  the 
taxable  year. 

Exemptions. — ^The  exemptions  specified  above  on  lines  (c)  to 
(i),  inclusive,  are  applicable  to  the  obligations  for  which  spaces 
have  been  provided,  but  the  total  amount  entered  in  these  spaces 
on  any  one  line  must  not  exceed  the  exemption  specified. 

The  exemption  on  lino  (d^  (maximum  |20,000)  is  limited  to 
three  timop  ^e  amount  of  Victory  Liberty  Loan  3|%  and  4}^ 
Notes  originally  subscribed  for  and  still  owned  at  the  date  of 
filing  the  return.  The  exemption  on  line  (/)  (maximum  $45,000) 
is  limited  to  one  and  one-half  times  the  amount  of  Fourth  Liberty 
Bonds  originalb'  tnibscribed  for  and  still  owned  at  the  time  of 
filing  the  return. 

In  case  the  Victory  Notes  or  the  Fourth  Liberty  Bonds 
originally  subscribed  for  were  disposed  of  before  filing  the 
return,  or  none  were  subscribed  for,  no  exemption  can  be 
claJmcNd  on  lines  (d)  and  (/).  , 


J 


How  to  fill  in  table  above. — Enter  on  line  (a)  in  the 
proper  columns  the  amounts  of  interest  computed  on  the  various 
obligations  held  during  the  taxable  period.  On  line  (6)  enter 
the  average  principals  which  will  produce  these  amounts  of 
interest  in  one  year,  as  the  exemptions  are  deducted  from 
these  amounts. 

The  average  principal  of  any  class  of  oblieiation  is  determined 
by  dividing  the  amount  of  interest  entered  in  any  column  by 
the  rate  of  interest  which  the  particular  class  of  obligation  bears. 
For  example,  if  the  amount  of  interest  entered  on  line  (a),  column 
2,  is  $1,200,  the  average  principal  would  be  this  amount  divided 
by  .04,  or  $30,000.  If  $25,000  exemption  was  claimed  in  this 
column,  the  interest  on  the  balance  ($5,000  at  4%,  or  $^) 
would  be  the  amount  of  taxable  interest. 

It  will  be  necessary  to  enter  the  rate  of  interest  received  at 
the  top  of  column  6,  provided  for  "Other  Obligations. " 

If  it  is  desired,  the  exemptions  may  be  applied  directly  against 
the  actual  holdings  for  the  period  held.  In  which  case  the 
entries  in  the  table  above  may  be  omitted,  and  in  lieu  thereof  a 
schedule  must  be  submitted  which  will  show  the  following 
information  with  respect  to  each  class  of  obligations  held:  To) 
Dates  and  amounts  of  purchases;  (6)  dates  and  amounts  of  sales- 
and  (c)  interest  received  or  accrued.  * 

Consolidated  returns.— In  the  case  of  an  aflUiated  group  of 
corporations,  this  form  and  answers  to  the  following  questions 
should  be  submitted  for  each  of  the  corporations  composimt 
the  group  which  held  during  the  taxable  period  any  of  ^ 
obligations  shown  in  the  table  above,  as  each  affiliated  corpo- 
ration  is  entitled  to  the  exemptions: 

VjOiat  amount  of  Victory  liberty  Loan  SfjS  and  4i%  Notes 
were  onginaU  v  subscribed  for  and  still  owned  at  date  of  filine 
this  return?    $ .^ 

What  amount  of  Fourth  Liberty  Loan  4{%  Bonds  wero 
ongin^y  subscribed  for  and  still  owned  at  date  of  filinir  thin 
return?    $ * 


Offloial  Title.  Short  Title. 

First  Liberty  Loan  Converted  4  %  Bonds  of  1932-47  (col.  2)      _    First  4 's 
First  Liberty  Loan  Converted  4\fc  Bonds  of  1932-47  (col.  3)"*        First  44.'s*~ 


Date  of  issue.  Interest  payable. 

November  15,  1817..  June  15,  DecembCT  15. 
y  9,  1918 June  15,  December  15. 


First  Liberty  Loan  Second  0)nv.  4i%  Bonds  ol  1932-47  (coi~4r'"FirHt  ^^^aH^ nlu     oi  inTo" r^  ^^»  December  15. 

Second  Lib^y  Loan  4%  Bonds  of  1927-42  (col.  2)._._::r'-£^nd1^«     ^   S^^Lf^'il^^fo^W?''®  ^^'  December  15. 


-I«44t1 


-17- 

The  problem  assumes  that  the  taxpayer,  a  corporation,  owned 
the  following  Liberty  Bonds  during  1920: 


Title 

Amount 

Int.  Reed,  or 

Accrued  Period  Held 

1st  si's 

1st  4|'s 

$20 , 000 . 00 

$  700.00 

Entire  Year 

50 . 000 . 00 

1903.15 

Jan.23-Dec.l5 

2nd  4's 

10,000.00 

400.00 

Entire  Year 

1st  2nd  4i's 

35 , 000 . 00 

1487 . 50 

It     It 

4th  4i's 

90 . 000 . 00 

3825 . 00 

It     It 

4|-  Cert.  Indebtedn. 

6,000.00 

270 . 00 

It     It 

War  Fin.  Bonds 

5% 

8,000.00 

400 . 00 

ti     It 

Victory  Sf's 

25 , 000 . 00 

937 . 50 

It     It 

Victory  4f' s 

20 , 000 . 00 

91.08 

Nov.27-Dec.31 

$50,000.  of  Fourth  4i's  and  $25,000.  of  Victory  3f' s  (Fifths)  were 
originally  subscribed  for  and  are  still  owned. 

Regarding  First  4:|-'s,  these  bonds  were  purchased  for  $48,000. 
plus  accrued  interest  of  $220.65  on  Jan.  22,  1920.   On  June  15, 
the  corporation  cashed  its  2H%  coupon,  receiving  $1,062.50,  semi- 
annual interest.  Of  this,  $841.85  is  income  for  the  period  Jan. 
23  to  June  15,  inclusive.  This  figure  may  be  obtained  by  taking 
145/183  of  $1,062.50,  as  the  Government  computes  interest  by  the 
exact-day  method,  and  on  181,  182,  183  and  184  day  bases,  depending 
on  the  half  year  periods.  Special  Actuarial  Tables  for  computing 
Liberty  Bond  Interest  are  issued  by  the  Treasury  Department.  For 
the  period,  June  16  to  Dec.  15,  the  corporation  received  $1,062.50 
additional  interest,  or  a  total  income  of  $841.85  plus  $1,062.50, 
giving  $1,904.35.  This  amount,  divided  by  4\%   gives  $44,808.24,  which 
is  considered  the  Average  Principal  of  4^'s  held  for  1921,  being 
the  equivalent  of  $50,000.  held  from  Jan.  23  to  Dec.  15,  inclusive, 
and  is  so  entered  on  the  schedule.  Likewise,  from  Government  Ta- 
bles, $20,000.  in  Victory  4f's  from  Nov.  27  to  Dec.  15  will  yield 
$46.72,  and  $41.76  from  Dec.  16  to  Dec.  31,  or  a  total  of  $88.48. 
This  eunount  is  divided  by  4f%,  giving  $1862.74  (accurate  to  4 
places).  $20,000.  in  bonds  held  from  Nov.  27  to  Dec.  31,  therefore, 
is  the  same  as  $1,862.74  held  for  a  year,  properly  averaged. 

The  averages  thus  obtained,  together  with  the  other  amounts 
given  above,  are  entered  in  the  proper  columns  and  exemptions  com- 
puted. Exemptions  are  applied  against  the  larger  interest  bonds 
first.  Thus,  the  4^  U.S.  Certificates  of  Indebtedness,  euid  the 
4-5-  interest  bearing  bonds,  should  be  exempted  first,  whenever 
possible,  leaving  8uiy  balance  to  be  used  in  exempting  4%  bonds. 

When  exemptions  have  been  exhausted,  the  balance  of  the  Prin- 
cipal of  each  issue  is  carried  to  column  (j).  Principal  in  Excess 
of  Exemptions.  The  rate  of  interest  for  each  separate  group  of 
bonds  is  then  applied  against  the  Principal  not  exempt,  and  the 
tajcable  interest  obtained.  The  taxable  interest  is  totalled,  and 
placed  in  line  (1).  It  is  then  transferred  to  the  Income  Tax  Re- 
turn and  the  proper  tajc  paid  on  it.  Note:  Purchase  price  of  bonds 
below  par  does  not  alter  exemption. 


-18- 


LECTURE  2. 

Questions  to  be  Answered. 

1.   State  which  of  the  following  items  are  excluded  from  income  for 
tax  purposes. 

Bonus  received  from  employer  in  addition  to  salary  at 

Christmas  time. 

Weekly  compensation  from  employer,  during  illness,  under  the 


(a 

(b 

(c 
(d 

(e 
(f 
(g 

(h 
(1 


Workmen's  Compensation  Act. 
Weekly  payments  received  from  fraternal  lodge  during  illness 
Monthly  payments  from  labor  union  during  a  period  of  unem- 
ployment. 

Property  left  an  individual  through  a  will. 
Salary  received  as  a  school  teacher  for  the  City  of  Boston. 
Salary  received  as  professor  at  Harvard  University  or  Ohio 
State  University. 

Military  salary  received  as  Lieutenant  for  the  year  1921. 
Notary  Public  fees  received  by  a  New  York  State  Notary  and 
one  appointed  in  the  District  of  Columbia. 


2.   Mrs.  "D"  was  divorced  April  1,  1921,  following  which  she  re- 
ceived alimony  of  $50.00  per  week  for  the  remainder  of  the  year. 
During  May  and  June  she  was  employed  as  Secretary  to  an  Attorney 
engaged  to  represent  the  State  in  a  special  case  and  received 
$125.00  per  month.  In  September,  she  invested  $8,000  in  a  partner- 
ship in  which  she  was  entitled  to  50%  of  the  profits.  Up  to  Dec.  31, 
the  partnership  made  a  profit  of  $13,500  of  which  she  received 
$4,000.  Compute,  in  detail,  her  taxable  income. 

3. 

(a)  State  the  Liberty  Bond  exemptions  for  the  year  1921  for  each 
of  the  five  issues  of  Liberty  Bonds. 

(b)  The  Pastor  of  a  certain  church  received  during  the  year  $1,800 
in  salary,  and  $300  in  Christmas  gifts.  He  was  also  provided 
with  a  home  and  board,  the  fair  cash  value  of  these  being 
$500,  and  $600  respectively.  State  his  taxable  income. 

4.   A  tax  payer  received  the  following  income  during  the  year  1921: 
Salary  of  $2400.00  as  factory  manager. 
Interest  of  $20.00  on  bank  deposits. 
Interest  of  $100.00  on  City  of  New  York  Bonds. 
Interest  of  $47.50  on  4f  Liberty  Bonds. 
Interest  of  $250.00  on  United  Drug  Bonds. 
Interest  of  $35.00  on  3i  Liberty  Bonds. 
Stock  Dividend  of  $200.00  from  the  Standard  Oil  Co. 
He  is  married  and  living  with  his  wife.  Compute  his  tax. 


-19- 


LECTURE  3 
GROSS  INCOME 


Items  Generally  Included. 
Items  Subject  to  Special  Rules. 
Effect  of  March  1,  1913,  Value. 

In  general.  Gross  Income  includes  all  items  received  not  spe- 
cifically exempt  by  law. 

SERVICES  RENDERED.  Gross  income  includes  compensation  for 
personal  or  professional  services  in  whatever  form  received,  such 
as  salaries,  wages,  commissions,  fees,  tips,  bonuses,  baptisnal 
offerings,  percentages  of  profits,  etc.,  whether  received  in  cash 
or  other  value,  also  rent,  living  quarters,  and  board  famished. 
Clergymen's  income,  also  salaries  of  employees  of  charitable  organi- 
zations and  the  Federal  Government  are  taxable.   Fees  of  law  suit 
witnesses,  in  both  State  and  Federal  Trials,  and  of  jurors  in  Fed- 
eral Cases  are  taxable.   While  fees  of  receivers  appointed  by 
State  Courts  are  exempt,  those  of  administrators  of  deceased  persons' 
estates  are  not,  nor  are  fees  of  guardians.   Insurance  paid  by  corpor- 
ations on  officers  or  employees  where  the  latter  are  beneficiaries 
is  additional  compensation  and  taxable. 

If *  an  individual  is  reporting  on  a  cash  basis,  salaries  and 
fees  earned  and  available  are  income,  whether  collected  or  not. 
Under  this  same  basis  of  reporting,  an  individual  should  exclude 
from  taxable  compensation  only  amounts  due  him  but  not  definitely 
determined  or  definite  amounts  due  him  but  not  yet  set  aside  so  as 
to  give  him  unrestricted  claim  thereto. 

If  an  individual  is  reporting  on  an  accrual  basis  he  should 
report  any  compensation  earned  whether  or  not  received  or  set  aside 
for  him.   The  only  exception  is  that  if  any  income  earned  has  not 
been  exactly  determined  he  should  postpone  reporting  it  as  taxable 
income  until  the  sunount  due  has  been  definitely  determined. 

Thus,  if  a  salesman  has  made  and  been  credited  with  $20,000,  in 
a  year  and  has  drawn  out  only  $4,000,  he  is  taxable  on  $20,000, 
even  when  reporting  on  a  cash-receipt  basis,  because  "crediting  him" 
with  the  ajnount  and  giving  him  unrestricted  right  thereto,  is  con- 
sidered "constructive  receipt".  (Gov.  Decision.)  Also,  where  a 
receiver,  (not  appointed  by  a  State)  received  $2,000  a  month  from 
a  railroad  company  from  1913  to  1918,  and  then  in  1918  it  was  final- 
ly determined  that  an  additional  $100,000  -  properly  prorated  over 
the  months  from  1913  to  1918,  -  should  be  paid  him,  it  was  held 
that  the  $100,000  is  taxable  income  for  the  year  in  which  determined, 
najnely  1918.   If,  however,  the  receiver  reported  on  a  cash  basis  and 
the  amount  was  merely  determined  in  1918,  and  not  paid  or  credited  to 
his  account  until  1919,  it  is  income  for  the  latter  year.   (Supreme 
Court  Decision) . 


-20- 

OTHER  ITEMS  OF  GROSS  INCOME:  Bank  interest  or  interest  re- 
ceived on  loans  is  taxable;  also  income  from  foreign  investments 
and  interest  on  bonds  of  foreign  governments.   Interest  on  postal 
savings  placed  with  the  Government  before  September  1,  1917,  even 
though  received  after  that  date,  is  exempt.   Interest  on  postal 
savings  deposited  on  and  after  September  1,  1917,  is  taxable.  Here- 
tofore a  2%   tax  paid  by  corporations  for  bondholders,  pursuant  to 
a  tax-free  covenant  clause,  was  included  in  an  individual's  taxable 
income.  Under  the  1921  law  this  amount  is  no  longer  reported  by 
the  individual.  However,  such  ajmount  is  still  deducted  from  a  tax- 
payer's income  tax  payable.   (See  Lecture  5.) 

Employees  who  have  room  and  board  furnished  should  report 
the  fair  cash  value  of  these  as  income  together  with  wages  re- 
ceived.  (See  Lecture  2  for  exemptions  for  ministers  of  the  Gospel.) 
Where,  however,  steamships  furnish  quarters  or  construction  com- 
panies camps  for  workers,  the  additional  value  need  not  be  reported. 
Pensions  received  by  retired  military  officers  are  taxable,  the  same 
as  pensions  received  by  other  federal  employees.  Military  and  naval 
compensation  received  for  1921  is  taxable. 

Profits  on  the  sale  of  capital  assets  such  as  land,  buildings, 
etc.,  are  taxable.  However,  such  capital  assets  held  for  a  period 
of  two  or  more  years,  when  sold,  are  subject  to  a  limited  tax  in  cer- 
tain cases.  Beginning  with  the  year  1922  the  rule  is,  that  if  a 
taxpayer  elects  he  may,  instead  of  computing  his  tax  for  all  income 
in  the  ordinary  way,  compute  it  first  for  ordinary  gains  and  then 
at  the  rate  of  12-§-%  on  his  capital  asset  gains.   If  he  elects  this 
method  of  computation  his  tax  shall  in  no  case  be  less  than  12-§-%  of 
his  taxable  income. 

To  illustrate:  an  individual  receives  a  salary  of  $8,000  for 
the  year  1922  and  sells  a  piece  of  land  at  a  profit  of  $100,000; 
his  taxable  income  is  $108,000.   Assume  he  is  married.   Ordinarily 
the  Surtax  on  $108,000  is  $26,300  and  the  income  tax  $8,320,  or  a 
total  of  $34,620.   If  this  amount  appears  excessive,  the  taxpayer 
may  then  compute  the  tax  in  the  ordinary  way  against  $8,000,  and 
to  the  result  add  12-|-%  of  the  profit  on  the  sale  of  the  capital 
asset.   Computed  this  way  the  Surtax  for  1922  on  $8,000  is  $20.00  and 
the  Normal  Tax  $320.00;  the  total  tax  $340.00.   To  this  is  added  12^% 
of  $100,000,  or  $12,500,  giving  a  total  tax  under  the  special  relief 
clause  of  $12,840. 

However,  if  the  taxpayer  elects  to  use  this  latter  method 
and  it  results  in  a  tax  less  than  12-|-%  of  his  entire  income,  - 
namely  12^%  of  $108,000,  -  or  $13,500,  then  he  shall  pay  the  latter 
amount  instead  of  $12,840. 

Among  other  items,  a  business  reports  net  sales  less  cost  of 
goods  sold  as  gross  income.  Rents,  royalties  and  income  from 
leases  should  be  reported.   If  tenants  pay  taxes  directly  to  cities, 
owners  of  property  should  report  such  amounts  as  additional  income. 
The  value  of  property  left  to  lessors  by  tenants  after  termination 
of  leases  is  taxable  income  to  lessors.   (See  new  ruling.  Lecture  6.) 


-21- 

Annuities  received  representing  profits  are  taxable,  and  should  be 
distinguished  from  annuities  which  are  distributions  of  the  corpus 
of  an   estate,  emd  not  taxable. 

Dividends  received  from  Americgui  Corporations  are  subject  to  the 
Surtax  only;  but  dividends  received  frOm  foreign  Corporations  are 
subject  to  both  the  Normal  tax  and  Surtax.  However,  if  a  foreign 
corporation  from  which  a  dividend  has  been  received  has  derived  over 
50%  of  its  gross  income  from  sources  within  the  United  States  for 
three  years  prior  to  the  taxable  year  such  dividends  will  be  sub- 
ject to  the  SurtEix  only,  the  same  as  in  the  case  of  American  Cor- 
porations.  (Act  of  1921). 

PAYMENTS  OTHER  THAN  CASH  should  be*  included  in  gross  income  at 
their  cash-equivalent  value.   If  a  corporation  pays  its  employees 
in  stock  instead  of  cash,  the  cash  value  of  the  stock  should  be 
reported  as  income.   Such  stock  paid  is  compensation  and  taxable, 
sold  should  be  distinguished  from  stock  dividends,  which  are  distri- 
butions of  profits. 

A  note  received  as  compensation  for  services  rendered  should 
be  reported  as  income  at  its  discounted  value,  and  if  collected  in 
full  in  a  later  year,  the  disceunt  should  at  that  time  be  reported 
as  income. 

Land  received  as  income  in  one  year,  the  title  to  which  is 
disputed  and  not  fully  determined  until  another,  is  income  for  the 
first  year.  However,  in  a  law  suit,  where  the  amount  awarded  will 
be  income  if  actually  obtained,  it  is  income  for  the  year  in  which 
received.  Accounts  Receivable,  charged  off  as  bad  debts,  and  then 
recollected,  are  income  when  paid. 

If  income  is  constructively  in  possession  of  an  individual, 
then  the  amount  earned  or  received  should  be  included  in  gross  in- 
come.  Thus,  if  a  Liberty  Bond  Coupon  is  due,  whether  cashed  or  not, 
it  becomes  income.   Also,  where  ordinary  bond  interest  is  due,  fail- 
ure to  collect  will  not  give  the  right  to  exclude  it  from  income. 
If  dividends  have  been  forwarded  to  an  individual  and  not  cashed, 
they  become  income.  If  a  savings  bank  credits  interest  to  a  person's 
account,  euid  does  not  allow  withdrawal  of  it  until  90  days  after  it 
is  so  credited,  it  becomes  income  as  of  the  time  it  is  first  placed 
in  his  account.  Ordinary  bank  interest  is  income  when  first  credit- 
ed to  a  concern's  account. 

However,  items  not  fully  reduced  to  possession,  or  to  which 
an  individual  does  not  have  unrestricted  claim,  need  not  be  in- 
cluded in  gross  income.   If  a  cooperative  bank  credits  a  person 
periodically  with  ten  dollars  and  he  does  not  obtain  a  full  share 
until  the  amount  has  reached  $100,  when  he  may  withdraw  it,  then 
the  amount  is  not  income  until  unrestricted  title  to  it  has  been 
obtained . 

Under  the  1921  law  profits  on  the  sale  of  a  gift  are  treated 
somewhat  differently  than  heretofore.  The  previous  rule  was  that 


-22- 

when  a  gift  was  received  its  cash-equivalent  market  value  at  the 
time  transferred  to  the  donee  was  considered  its  cost;  and  this 
value  was  thereafter  used  as  the  basis  of  determining  any  gain  in 
case  of  sale.  The  new  rule  is  that  the  cost  to  the  donor  will  be 
-considered  the  cost  to  the  donee  in  case  of  gifts  received  after 
Dec.  31,  1920.   Thus  "A"  bought  a  piece  of  land  in  1916  for  $20,000. 
He  donated  it  to  his  son  in  Jan.,  1920,  at  which  time  it  had  a  market 
value  of  $25,000.  The  son  sold  it  for  $28,000  in  Dec,  1921.  He 
reports  $8,000  as  taxable  income  for  the  year  1921  instead  of  $3,000 
as  heretofore.   (Act  of  1921.) 

In  the  case  of  property  acquired  through  a  will  or  by  statutes 
of  descent  the  former  rule  exists,  namely;  that  the  market  value 
at  the  time  property  is  received  will  be  the  basis  for  determining 
gain  or  loss. 

OTHER  ITEMS  OF  GROSS  INCOME:   Certain  other  items  of  gross 
income  may  be  treated  as  follows:  If  a  concern  is  employed  on  a 
long-term  contract,  such  as  the  erection  of  a  large  factory  or 
immense  office  building,  the  income  from  the  contract  need  not  be 
reported  until  the  termination  of  the  work.  However,  if  a  con- 
cern prefers  to  report  the  estimated  profit  on  the  contract  an- 
nually it  may  do  so.   Thus,  if  a  building  will  cost  approximately 
$3,000,000  and  the  contract  price  is  $3,600,000  a  contractor  may 
estimate  in  advance  that  his  profit  for  the  work  will  be  $600,000. 
If  at  the  end  of  the  first  year  he  has  expended  $1,000,000,  then 
he  may  figure  that  the  work  is  one-third  completed  ($1,000,000 
cost  over  $3,000,000  cost),  and  regardless  of  amounts  received  as 
payments  on  the  building,  he  may  report  $200,000  as  the  profit  for 
the  year,  or  one-third  of  the  estimated  final  profit  of  $600,000. 

Installment  sales  may  be  handled  as  follows:   If  goods  are 
sold  for  credit,  the  total  amount  to  be  paid  may  be  considered 
income  at  the  time  of  sale.   This  is  usually  done  in  the  case  of 
sales  the  collections  on  which  will  be  received  within  a  reason- 
ably short  time.   If  goods  are  sold  on  the  installment  plan,  with 
an  initial  payment  of  25%  or  more,  then  the  total  sales  price  is 
returned  as  income  in  the  year  of  the  sale.   If  the  initial  payment 
is  not  substantial,  then  the  following  method  may  be  employed  in 
reporting  income  from  installment  payments: 


-23- 

four  installments,  the  purchaser  defaulted  and  the  piano  was  re- 
turned, the  company  would  then  have  to  report  the  remaining  $120  re- 
ceived, out  of  the  first  four  payments  of  $50  each,  as  additional 
profit.   In  this  way,  the  full  $200  received  would  have  been  treated 
as  income.  When  an  inventory  of  merchandise  is  taken  at  the  end  of 
the  year,  the  piano  is  included  in  such  inventory  at  its  deprecia- 
ted value,  and  thus  any  loss  taken. 

When  plots  of  real  estate  are  divided  into  lots,  and  sold, 
profit  on  each  lot  should  be  reported,  as  a  real  estate  concern 
is  not  permitted  to  wait  until  all  of  a  certain  plot  is  disposed 
of  before  reporting  taxable  income.   Thus,  a  company  buys  a  plot 
of  land  for  $100,000.   It  is  then  divided  into  30  or  40  lots, 
which  sell  at  varying  prices  from  $2,000  to  $5,000.   If  at  the 
end  of  the  first  year  the  company  has  sold  about  10  lots,  which 
have  returned  about  $30,000  in  cash,  it  is  not  permitted  to  claim 
that  it  has  not  yet  recovered  the  original  cost,  but  must  pro- 
rate, as  carefully  as  possible,  the  $100,000  original  cost  over 
the  different  lots  in  proportion  to  their  value;  compute  the  pro- 
fit on  each  piece  of  land  sold,  and  include  such  total  profit  in 
gross  income.  Real  estate  sales  on  the  installment  plan  are  re- 
ported the  same  as  personal  property  sales,  described  above. 

An  individual  whose  taxable  year  ends  December  31,  and  who 
receives  income  from  a  partnership  reporting  on  a  date  other  than 
Dec.  31,  includes  in  his  return  profits  made  for  the  fiscal  period 
ending  within  his  taxable  year.  Thus,  a  partnership  closes  its 
books  March  1,  1921,  showing  a  profit  of  $20,000,  "A's"  share  be- 
ing $10,000.   "A"  also  makes  a  salary  during  the  calendar  year  of 
$5,000.  He  reports  as  of  Dec.  31,  his  $5,000  salary  made  during 
1921,  and  the  $10,000  allotted  to  him  March  1,  1921,  but  earned 
from  March  1,  1920,  to  March  1,  1921,  regardless  of  when  he  is 
paid  by  the  partnership. 

Sale  of  Stock:  Several  methods  are  used  for  computing  the 
profit  to  be  included  in  gross  income  when  stock  is  sold. 

(1)  An  ordinary  purchase  and  sale  of  a  block  of  stock  is  re- 
ported the  same  as  any  other  business  transaction,  except  that 

a  broker's  fee  is  added  to  the  cost  of  stock  when  purchased  and 
deducted  from  the  selling  price  when  sold.   (See  Lecture  5). 

(2)  If  a  bonus  of  preferred  stock  is  given  with  the  purchase 
of  common  stock,  any  additional  cost  attributable  to  such  bonus 
may  be  used  to  determine  the  exact  cost  of  each  share  of  common 
and  preferred  stock.  Thus,  10  shares  of  common  stock  are  pur- 
chased for  $1,100.  ($110.  a  share),  and  a  bonus  of  5  shares  of 
preferred  stock  given.  The  facts  may  show  that  the  common  stock 
if  sold  without  the  bonus  would  bring  in  only  $90.  per  share 

or  $900.   Therefore,  the  remaining  $200.  divided  by  5  shares, 
giving  a  cost  of  $40  per  share,  may  be  used  to  get  a  cost-value 
for  the  preferred  stock.  In  case  of  sale  later,  $90.  and  $40. 
should  then  be  used  as  the  cost  price  of  common  stock  and  pre- 
ferred stock,  respectively. 


-24- 

(3)  If  it  is  impractical  or  impossible  to  allocate  any  def- 
inite cost  to  each  share  of  common  and  preferred  stock  in  case 
(2)  above,  then  no  taxable  profit  need  be  reported  until  the 
total  cost  has  first  been  recovered.   Thus,  8  shares  of  common 
may  be  sold  for  $100.  each  and  2  shares  of  preferred  for  $75. 
each,  the  holder  receiving  $950.   It  is  apparent  that  in  all 
probability  a  profit  is  being  made  on  the  sale  of  each  share, 
but  as  the  original  cost,  $1,100.,  has  not  yet  been  recovered, 
no  profit  need  be  reported. 

(4)  If  a  stock  dividend  is  received,  its  value  is  not  taxable, 
but  for  purposes  of  future  sales,  certain  rules  must  be  observed 
in  computing  the  cost  value  of  such  stock. 

(a)  If  the  stock  received  as  a  dividend  is  of  the  same  class 
as  the  stock  upon  which  it  was  declared,  cost  for  purpose  of 
computing  profit  in  case  of  sale  is  obtained  as  follows:  10 
shares  of  common  were  purchased  for  $100.  each,  total  cost  $1,000. 
Later  a  40%  stock  dividend  was  received  by  the  holder,  of  4  shares 
additional.  The  14  shares  cost  $1,000.  or  $71.43  each  ($1,000. 
divided  by  14) ,  and  in  case  of  future  sale  of  either  the  original 
stock  or  the  dividend  stock,  $71.43  is  considered  the  cost. 


(b)  If  the  stock  received  as  a  dividend  is  of  a  different  class 
and  price  than  the  stock  held,  computation  to  obtain  cost  is  as 
follows:  100  shares  of  common  stock  were  purchased  for  $9,000. 
($90.  per  share)  in  1917.  A  20%  stock  dividend,  payable  in  pre- 
ferred stock,  was  declared  in  1921,  at  which  time  the  market  value 
of  the  original  common  stock  was  $80.  per  share,  and  the  dividend 
preferred  stock  $100.  per  share;  total  market  value,  1921,  common 
$8,000.,  preferred  (20  shares)  $2,000.;  total  combined,  $10,000. 
At  the  time  the  dividend  was  declared,  the  preferred  stock  rep- 
resented 1/5  of  the  total  worth  of  all  the  stock  ($2,000.  of  $10,000). 
As  the  cost  originally  was  $9,000.,  then  the  actual  cost  of  the 
preferred  stock  is  considered  to  be  1/5  of  $9,000.  -  the  original 
cost  of  the  common  stock,  -  or  $1,800.,  and  the  common  stock  is  re- 
duced to  4/5  of  $9,000.  or  $7,200.   For  purposes  of  future  sales 
of  either  group,  the  common  stock  cost  $72.  per  share  ($7,200. 
divided  by  100  shares),  and  the  preferred  $90.  per  share  ($1,800. 
divided  by  20  shares). 

If  a  person  sells  his  private  residence  on  which  he  has  not 
been  allowed  to  take  depreciation  in  prior  tax  returns  he  need  not 
increase  his  profit  by  such  depreciation  in  reporting  gross  in- 
come. Thus,  a  house  was  purchased  in  1915  for  $5,000.  and  sold 
for  $6,000.  in  1920.  The  owner's  family  were  the  sole  occupants 
2Uid  hence  he  was  not  permitted  to  deduct  depreciation  in  his  returns 
from  1915  to  1920.  He  reports  only  $1,000.  profit  for  the  year  1920. 
If  depreciation  had  been  taken,  he  would  report  somewhat  as  fol- 
lows: Sale  price  $6,000.   Cost  $5,000.  less  $500.  depreciation,  or 
present  value  $4,500.,  profit  for  1920-$1,500. 


-2^. 


If  a  corporation,  in  addition  to  paying  an  officer  a  salary, 
also  gives  a  bonus,  the  latter  is  taixable.  But  if  the  bonus 
is  not  granted  until  the  next  year  after  it  is  earned,  it  is 
not  income  until  that  time.  Thus,  a  corporation  sets  aside  on 
Dec.  31,  1920,  a  sum,  out  of  which  its  officers  and  employees 
are  to  receive  a  bonus.  The  bonus  is  not  assigned  to  individuals 
until  Jan.  2,  1921,  and  then  paid.  The  amount  is  taxable  for  1921 
stnd  not  for  1920,  guid  the  tax  thereon  not  payable  until  1922, 
because  the  officers  and  employees  did  not  have  unrestricted 
title  to  their  respective  share  until  the  next  year.  This  is 
true  even  though  the  company  has  deducted  the  amount  as  expense 
in  1920,  and  even  though  the  individual  recipients  reported  on 
a  so-called  accrual  basis.   (Gov.  Decision.) 

Amounts  paid  as  rewards  for  special  meritorious  work  should 
be  included  in  gross  income.  Thus,  a  person  is  rewarded  for 
having  stopped  a  bauik  robbery;  although  apparently  such  reward 
is  a  gift,  it  is  considered  taixable  income.   (Gov.  Decision.) 

Gross  income  should  include  only  that  actual  profit  which  has 
accrued  since  March  1,  1913,  when  items  have  been  owned  prior 
to  that  date.   Thus,  a  business  was  established  in  1905,  and 
when  sold  in  1921,  the  sum  of  $100,000.  was  paid  for  its  Good 
Will.  Ordinarily,  the  taixpayer  would  have  to  pay  an  income  tax 
on  $100,000.  for  the  profit  made  on  the  sale  of  the  business. 
He  is  permitted,  however,  to  show  that  the  Good  Will  may  have 
been  worth  $60,000.  or  $70,000.  on  March  1,  1913,  the  day  the 
tax  law  became  effective,  and  if  so,  he  pays  a  tax  on  only 
$30,000.  or  $40,000. 

In  the  case  of  fluctuating  values,  however,  a  different  rule, 
in  conformity  with  recent  Supreme  Court  Decisions,  must  now  be 
followed.  In  brief,  only  the  ACTUAL  LOSS  OR  GAIN  on  the  sale  of 
assets  should  be  taken  in  tajc  returns,  and  only  that  part  of  such 
actual  loss  or  gain  assignable  to  the  period  after  March  1,  1913. 
This  is  best  understood  by  means  of  illustrations. 

Illustrations:   1.  Stock  cost  $10,000  in  1910,  was  worth 
$13,000  March  1,  1913,  and  sold  for  $21,000  in  1921.   Actual 
profit  $11,000,  taxable  profit,  $8,000,  being  that  part  of 
the  actual  profit  made  since  March  1,  1913. 


2.  Stock 
1913,  and  sold 
tajcable  profit, 
since  March  1, 
only  that  part 
March  1,  1913, 


cost  $10,000  in  1910,  was  worth  $8,000  March  1, 
for  $15,000  in  1921.   Actual  profit,  $5,000, 
$5,000.  A  total  profit  of  $7,000  has  been  made 
1913,  but  the  actual  profit  only  may  be  taxed,  and 
of  the  actual  profit  assignable  to  the  period  after 
so  a  maximum  profit  of  $5,000  is  reported. 


3.   Stock  cost  $10,000  in  1910,  was  worth  $15,000  March  1, 
1913,  and  sold  for  $13,000  in  1921.  Actual  gain  $3,000,  tax- 
able gain,  nothing.  While  an  actual  profit  of  $3,000,  was  made, 
none  of  this  actual  profit  is  assignable  to  the  period  after 


-26- 

March  1,  1913,  hence  no  gain  is  reported,  for  tax  purposes.  Al- 
so, no  loss  is  taken. 

4.  Stock  cost  $10,000  in  1910,  was  worth  $8,000  March  1, 
1913,  and  sold  for  $4,500  in  1921.  Actual  loss  $5,500,  al- 
lowable loss  for  tax  purposes  $3,500.  Although  there  was  an  act- 
ual loss  of  $5,500  only  $3,500  of  it  is  assignable  to  the  period 
after  March  1,  1913.   ($8,000  less  $4,500.) 

5.  Stock  cost  $10,000  in  1910,  was  worth  $12,000  March  1, 
1913,  and  sold  for  $7,000  in  1921.  Actual  loss  $3,000,  allow- 
able loss  for  tax  purposes  $3,000.  A  loss  of  $5,000  has  been 
suffered  since  March  1,  1913,  but  only  the  actual  loss  may  be 
taken  and  only  that  part  of  the  actual  loss  assignable  to  the 
period  after  March  1,  1913.  Therefore  only  $3,000  may  be  taken, 
and  as  this  amount  is  assignable  to  the  period  after  March  1, 
1913,  the  $3,000  represent  the  allowable  deduction  for  tetx 
purposes. 

6.  Stock  cost  $10,000  in  1920,  was  worth  $7,000  March  1, 
1913,  and  sold  for  $9,000  in  1921.  Actual  loss  $1,000,  allow- 
able loss,  for  tax  purposes,  nothing.  While  an  actual  loss  of 
$1,000  was  suffered,  none  of  this  actual  loss  can  be  assigned 
to  the  period  after  March  1,  1913,  therefore  no  loss  is  report- 
ed. Also,  no  gain  is  included  in  gross  income. 

Other  phases  of  the  subject  relating  to  gross  income,  such 
as  what  is  meeuit  by  reporting  income  on  a  cash  basis  and  on  an 
accrual  basis,  what  is  meant  by  fiscal  year  and  calendar  year, 
what  steps  are  necessary  to  change  from  a  fiscal  year  to  cal- 
endar year  basis,  etc.,  will  be  considered  under  miscellaneous 
topics  in  Lecture  12, 


-27- 


LECTURE  3. 
Questions  to  be  Answered. 

1. 

A  taxpayer  received  during  the  year,  the  following  amounts 
in  interest:  $1,000  from  mortgages  on  real  estate,  $500  from  City 
of  Boston  Bonds  owned,  $50  from  Bonds  issued  under  the  Federal 
Farm  Loan  Act  of  1916,  $45  in -bank  interest,  and  $200  from  so- 
called  2%  tax-free  covenant  bonds.  State  the  amount  of  tgixable 
income  he  would  report  from  the  above. 

2. 

An  individual  bought  stock  as  follows:  United  Steel:  in  1914 
ten  shares  at  $90  per  share,  in  1915  five  shares  at  $95  each, 
in  1918  ten  shares  at  $120  each.  He  sold  four  shares  for  $112 
each  in  1917  and  sold  twelve  more  for  $93  each  in  1921.  Com- 
pute the  taxable  profit  or  allowable  loss  for  1921. 

3. 

An  instructor  is  teaching  in  a  state  college,  his  salary  be- 
ing paid  by  the  State.   Of  the  $3,000  received,  10%  is  paid  by 
the  Federal  Government  to  the  State,  and  then  paid  to  the  instruc- 
tor. This  same  individual  received  $1,400  during  the  year  as 
administrator  of  an  estate,  and  $300  as  receiver  appointed  by 
State  Court  in  dissolution  of  a  partnership.  State  the  amount 
which  he  should  include  in  taxable  income. 

4. 

An  employee  of  a  manufacturing  concern  received  $2,600  salary 
for  the  year,  also  $90  in  dividends  from  the  same  company,  as 
well  as  $200  in  interest  from  bonds  owned.  He  also  received  $95 
in  interest  from  4f  Victory  Notes  held  throughout  the  entire  year. 
The  above  is  his  total  income  from  all  sources  for  the  year.  He 
is  single.  Compute  his  tax. 

5. 

A  Chaplain  with  the  A.E.F.  during  the  war  remained  with  the 
Army  of  Occupation,  resigning  Jan.  31,  1921,  during  which  time 
he  received  compensation  at  the  rate  of  $3,000  a  year  from  the 
Government.  He  returned  to  his  congregation  May  1,  receiving 
$1,000  salary  for  the  remainder  of  the  year.  He  also  received 
$308  from  May  1  to  Dec.  31  on  account  of  marriage  fees,  baptismal 
fees,  special  donations  for  special  services,  etc.  The  congrega- 
tion furnished  him  a  home,  the  fair  cash  value  of  which  was  $50  a 
month,  starting  June  1.  As  congratulations  for  his  military  serv- 
ices the  congregation  gave  him  $500  in  cash  and  a  $50  watch  Sept.  1 
He  is  single.  Compute  his  tax. 


-28- 


LECTURE  4. 

Allowable  Deductions. 

The  law  classifies  Allowable  Deductions . from  Gross  Income  under 
the  following  twelve  captions:  Business  Expenses,  Interest,  Taxes, 
Losses  (three  groups).  Bad  Debts,  Depreciation,  Amortization,  Deple- 
tion, Charitable  Contributions  and  Property  Seizures. 

BUSINESS  EXPENSES:  Under  this  heading,  all  ordinary  and  neces- 
sary expenses  incurred  in  carrying  on  a  business  may  be  deducted, 
including  expenditures  on  account  of  salaries,  materials,  supplies, 
incidentals,  labor,  insurance,  rent,  royalties,  repairs,  selling 
and  administration. 

Cost  of  goods  sold  is  usually  deducted  from  sales,  giving  gross 
profit,  from  which  the  above  business  expenses  and  other  allowable 
deductions  are  subtracted,  resulting  in  taxable  business  income. 
Cost  of  goods  sold  should  consist  in  general  of  inventories  at  the 
beginning  of  a  year,  plus  purchases,  less  inventories  at  the  end 
of  a  year.   If  inventories  are  not  obtainable,  then  purchases  may 
be  used  for  cost  of  goods  sold.   If,  however,  inventories  are  nec- 
essary in  any  business  to  get  correct  profit,  they  must  be  used. 
If  in  prior  tax  returns  a  company  has  failed  to  use  inventories 
where  necessary  for  correct  tax  computations,  the  Government  is 
insisting  that  correct  returns  be  made  with  inventories  estimated 
as  accurately  as  possible. 

Salaries  are  allowable  deductions  only  where  they  represent 
reasonable  compensation  for  services  rendered.   Salaries  are  con- 
sidered unreasonable  (1)  when  they  are  obviously  given  for  pur- 
poses of  evading  taxes,  and  (2)  when  they  increase  suddenly  and 
substantially,  apparently  because  a  concern  has  made  a  higher  pro- 
fit than  usual.  In  such  cases,  any  excess  above  reasonable  sal- 
aries received  by  chief  stockholders  is  considered  a  distribution  of 
profits,  and  taxed  as  dividends.  Excessive  compensation  received 
by  other  than  owners  of  substantial  amounts  of  stock  is  subject  to 
both  the  Normal  Tax  and  Surtax,  and  is  not  deductible  by  a  corpor- 
ation. By  decision,  the  Government  has  declared  that  all  agreements 
for  large  salaries  made  prior  to  but  payable  in  the  high  tax  years 
1917,  -  18,  and  -  19,  will  be  allowed  regardless  of  reasonableness 
of  amounts  paid. 

Occasionally,  payments  by  corporations,  ostensibly  for  salaries, 
may  represent  payments  for  a  business  purchased.  Such  a  case  may 
arise  where  a  corporation  purchases  a  partnership,  and  thereafter 
pays  the  former  partnership  owners  an  unreasonably  large  compensa- 
tion. Any  excess  payments  will  be  considered  part  of  the  purchase 
price  and  not  deductible  expenses  on  account  of  salaries. 

Ordinary  rent  is  an  expense.   If  a  lessee  pays  taxes  directly 
to  a  city  for  a  lessor,  such  taxes  are  additional  rental  payments 
etnd  deductible.  If  a  tenant  erects  property  on  land  or  perma- 


-29- 

nently  attaches  improvements  to  buildings,  the  expense  of  these 
should  be  prorated  over  the  life  of  the  tenant's  lease,  as  they 
do  not  belong  to  him  at  the  termination  of  the  lease. 

Other  deductions  coming  under  business  expenses  are  the  fol- 
lowing: bonus  paid  as  a  reward  for  work  performed  or  as  a  stim- 
ulus to  further  work,  pensions  paid  to  employees'  families,  com- 
pensation paid  to  helpers  while  injured  or  ill,  salary  paid  to  a 
widow  for  a  limited  period  after  a  husband's  death,  and  salaries 
paid  to  employees  while  absent  in  war  service.  Gifts,  as  previously 
explained,  are  not  deductible,  and  are  not  income  to  the  recipients. 

Professional  men  may  claim  as  deductions,  cost  of  supplies,  ex- 
penses and  repairs  on  autos  used  for  business  calls,  dues  and  sub- 
scriptions to  professional  societies  and  journals,  rent  for  office 
and  rooms,  and  light,  heat,  phone,  etc.,  for  office.  If  a  profes- 
sional maui  has  an   office  in  his  own  home,  only  a  proper  proportion 
of  his  rent,  light,  heat  and  phone  may  be  deducted  out  of  his  total 
home  expenditures.   If  he  has  an  established  place  of  business  in 
the  business  section  of  a  community,  and  only  incidentally  received 
patients  or  clients  at  his  home,  he  cannot  deduct  for  home  office 
expenses.  If  a  professional  man  owns  his  own  home,  he  may  deduct 
nothing  for  rent  on  any  part  used  as  an  office  but  may  deduct  for 
other  business  expenses. 

Farmers  may  deduct  expenses  for  tools,  small  farm  implements, 
food  purchased  for  stock,  farm  help,  auto  up-keep,  cost  of  seeds, 
etc.   Land  and  orchard  improvement  costs,  purchase  of  auto  or 
truck,  purchase  of  draft,  dairy  and  breeding  animals,  cost  of  farm 
buildings,  etc.,  may  not  be  deducted  as  these  are  capital  charges. 
If  a  person  runs  a  farm  for  pleasure,  any  loss  resulting  is  not 
an  allowable  expense,  but  any  profit  made  thereon  is  taxable.   If 
a  farmer  grows  crops  which  take  more  than  a  year  to  mature,  he 
may  report  on  a  crop  basis.   In  no  case  should  a  farmer  deduct 
food  grown  on  a  farm  and  fed  to  animals,  as  it  has  not  been  in- 
cluded in  income.  A  special  form,  called  1040  F,  is  used  in  con- 
nection with  reporting  the  tameable  income  from  farms. 

Ordinarily  all  charges  are  deductible  in  the  year  in  which  they 
were  incurred.   Thus,  a  person  had  goods  stolen  from  his  store  in 
1918,  but  did  not  discover  the  theft  until  1919.  He  must  deduct  the 
loss  for  the  former  year.  However,  amounts  paid  for  personal  in- 
jury are  deductible  when  put  in  judgment  and  paid,  not  when  the 
accident  or  injury  occurred.   (See  Page  32  -  Deduction  of  Unusual 
Losses. ) 

Incidental  repairs,  which  do  not  materially  prolong  the  life 
of  an  asset,  but  merely  keep  it  in  ordinary  operating  condition, 
are  deductible.  But  repairs  to  the  extent  that  they  are  actually 
replacements,  or  retard  deterioration,  are  not  expenses,  and  not 
deductible . 

Traveling  expenses,  incurred  in  connection  with  a  trade  or 
business,  may  be  deducted  in  entirety,  beginning  with  the  year 


-30- 

1921.  Heretofore,  railroad  fare  and  other  business  expenses  were 
deductible,  but  in  the  case  of  room  and  board,  only  the  differ- 
ence between  such  expense  while  at  home  and  while  traveling  was 
deductible.   (Act  of  1921.) 

INTEREST  on  indebtedness,  whether  paid  on  personal  or  busi- 
ness obligations,  is  deductible.  Interest  paid  on  a  bank  loan 
to  a  busine'ss  is  an  expense,  also  interest  paid  on  a  mortgage  on 
a  house  in  which  the  taixpayer  and  his  family  are  the  sole  occu- 
pants. Interest  paid  on  mortgages  and  loans  on  which  individ- 
uals are  not  liable,  but  in  which  they  have  an  interest,  is  de- 
ductible. Thus,  "A"  has  his  house  mortgaged  by  a  bank,  and  "B" 
purchases  the  property  from  "A",  agreeing  to  pay  the  interest  on 
the  mortgage  to  the  bank  although  not  legally  liable.  "B"  may 
deduct  the  interest. 

On  the  other  hand,  interest  paid  on  money  borrowed  to  pur- 
chase securities  the  income  from  which  is  exempt  may  not  be  de- 
ducted.  Thus,  "C"  borrows  from  a  bank  $10,000  to  assist  him  in 
purchasing  $15,000  worth  of  State  Bonds,  paying  the  bank  $600 
interest  for  the  year.  He  may  not  deduct  the  interest  thus  paid, 
as  any  income  from  State  Bonds  is  exempt.  Interest  gratuitously 
paid  for  a  friend  on  his  debts  is  not  deductible;  also  interest 
charged  on  investment  accounts  in  a  partnership  or  corporation, 
as  such  interest  is  a  means  of  distributing  profits.   Interest 
paid  on  scrip  dividends  is  deductible.   Previous  to  1921,  all 
interest  paid  on  loans  to  purchase  Liberty  Bonds  was  deductible, 
whether  the  income  from  such  bonds  was  taxable  or  exempt.  For 
1921,  interest  on  loans  to  purchase  Liberty  Bonds  is  deductible 
only  if  such  bonds  were  subscribed  for  during  the  original  drives 
and  were  issued  after  Sept.  24,  1917.   (Act  of  1921.) 

TAXES:  With  few  exceptions,  all  tsixes,  both  business  and 
personal,  are  deductible.  Among  the  tajces,  for  any  and  all  pur- 
poses, which  may  be  deducted  are  the  following:   state  and  city 
taxes  on  personal  and  real  property,  whether  used  in  business  or 
not,  state  income  tax,  poll  tax,  automobile  license  (tax),  spe- 
cial liquor  or  oleomargarine  license  (tax),   special  consumers' 
war  taxes,  such  as  soda  taxes  and  theatre  amusement  taxes,  fed- 
eral capital  stock  tajc,  and  any  special  federal  or  state  taxes. 
Import  duties  may  be  deducted  as  taxes  if  not  included  in  cost 
of  goods  sold  and  thus  deducted  from  sales.   Luxury  taxes,  such 
as  the  taxes  on  automobiles,  pianos,  canoes,  cameras,  toilet 
articles,  etc.,  levied  against  manufacturers  and  practically 
always  collected  from  the  consumer,  are  deductible  by  the  manu- 
facturer but  not  by  the  consumer.   The  consumer  may  deduct  the 
so-called  war  taxes  on  eunusements,  etc.,  but  not  the  excise  and 
stamp  taxes  levied  against  manufacturers  and  usually  collected 
from  the  public. 

States  cannot  levy  taxes  against  national  banks,  but  usually 
collect  an  amount  from  such  banks  which  in  reality  represents  an 
assessment  against  the  individual  stockholders.  Beginning  in 
1921,  banks  and  other  corporations  may  deduct  any  such  ajnounts 


paid  for  shareholders,  as  expense,  provided  reimbursement  is  not 
made  by  the  individual  shareholders.  The  latter  may  not  deduct 
such  taxes  as  expenses.   In  1920,  banks  did  not  report  such  taxes 
as  deductible,  but  considered  them  distributions  of  profits  to  the 
stockholders,  who,  in  turn,  reported  them  as  dividends  received 
and  taxes  paid  out.  Ordinary  tsixes  levied  by  foreign  countries 
against  American  Citizens,  are  deductible  with  other  expenses, 
but  income  taxes  collected  by  foreign  countries  are  deductible 
from  the  income  tax  itself.   (See  Lecture  6.)   {Act  of  1921.) 

Certain  taxes  may  not  be  deducted:   (1)  Federal  Corporation 
and  Individual  Income  Taxes,  including  Excess  Profits  Taxes  ajid 
Surtaxes,  as  these  are  a  distribution  of  part  of  profits  to  the 
Government;   (2)  Income  taxes  paid  foreign  Governments,  as  these 
are  usually  deducted  from  the  income  taxes  payable;   (3)   Improve- 
ment gind  local  benefit  taxes,  as  these  expenditures  should  be  cap- 
italized;  (4)  Amounts  paid  by  corporations  to  States  for  share- 
holders, as  previously  explained.   To  be  a  local  benefit  tax,  and 
not  deductible,  the  amount  paid  out  by  the  taxpayer  as  tax  should 
be  expended  for  the  benefit  of  the  property  assessed.  Thus,  prop- 
erty owners  on  a  single  street  in  a  city,  taxed  to  improve  the 
sidewalks  of  the  street,  pay  a  local  benefit  tax,  and  should  add 
such  expenditure  to  the  cost  of  their  property.   Inheritance  taxes, 
under  the  1921  law,  are  to  be  accrued  when  due.   (Act  of  1921.) 

LOSSES:   Losses  may  be  deducted  if  (1)  incurred  in  a  person's 
business,  (2)  incurred  in  a  transaction  entered  into  for  profit, 
or  (3)  when  resulting  from  fire,  storm,  casualty,  theft,  etc., 
and  not  connected  with  a  person's  business.  When  assets  are  sold 
their  cost  less  depreciation  usually  gives  the  basis  for  deter- 
mining profit  or  loss.  When  destroyed  or  damaged,  their  cost  less 
depreciation,  whether  ever  taken  or  not,  less  salvage,  less  insur- 
ance received,  gives  the  basis  for  determining  the  loss,  or  occa- 
sionally and  rarely  the  gain.   Thus  "A"  bought  a  house  in  1915  for 
$6,000  and   depreciated  it  $200  a  year  for  four  years,  after 
which  it  was  burned,  gtnd  he  received  $3,000  in  insurance  and 
$300  in  salvage.  He  reports  a  loss  of  $1,900  computed  as  follows: 
Cost  $6,000  less  depreciation  $800,  less  insurance  $3,000,  less 
salvage  $300,  total  $4,100,  total  loss  $1,900.   If  a  building  is 
voluntarily  abandoned  or  removed,  its  cost  less  depreciation,  less 
salvage,  gives  the  basis  for  the  loss.   If  property  destroyed  had 
been  acquired  prior  to  March  1,  1913,  its  fair  market  value  as  of 
that  date  should  be  used  as  the  basis  for  determining  any  loss.   (Act 
of  1921).   If  a  person  buys  land  and  old  buildings,  and  then  razes 
the  latter,  leaving  the  land  cleared,  he  cannot  deduct  the  removal 
expense  and  cost  of  the  building  as  a  loss,  but  adds  the  cost  of  the 
Istnd,  building  and  razing  expense  together  to  obtain  the  total  cost 
of  the  land  unencumbered  as  apparently  desired  when  original  pur- 
chase was  made. 


After  November  23,  1921,  no  loss  is  allowed  on  the  sale  of 
securities  if  substantially  identical  property  is  purchased  thirty 
days  before  or  after  the  sale  stnd  held  for  any  period  of  time. 
Thus,  an  individual  owns  Steel  Stock  which  cost  $100,000,  but  is 


worth  $70,000  on  the  market.  If  he  sells  the  stock  Dec.  27,  just 
prior  to  the  close  of  the  taxable  year,  in  order  to  take  a  $30,000 
loss  against  his  taxable  income,  and  then  purchases  additional  Steel 
Stock  for  about  $70,000  some  time  in  January,  then  the  $30,000  loss 
may  not  be  taken.  So,  also,  if,  about  Dec.  1,  the  taxpayer  pur- 
chased about  $70,000  worth  of  Steel  Stock,  and  then  about  December  27 
sold  the  original  $100,000  for  $70,000,  the  loss  may  not  be  taken. 
If  the  taxpayer  purchased  only  $35,000  worth  of  Steel  Stock  about 
December  1,  then  one-half  of  the  $30,000  loss  when  the  $100,000 
worth  was  disposed  of,  might  be  taken.   (Act  of  1921.) 

Ordinarily,  charges  are  deductible  when  incurred.  Treasury  De- 
cision 3262,  Dec.  20,  1921,  explains  that  under  the  new  1921  Act, 
unusual  losses  need  not  always  be  deducted  when  they  occur.  Such 
losses,  however,  may  be  taken  in  other  than  the  year  in  which  they 
occur,  only  in  the  discretion  of  the  Commissioner  of  Internal  Revenue 
and  after  the  taxpayer  has  shown  that  otherwise  there  would  be  an 
injustice  to  himself  and  that  the  deduction  at  another  date  would 
more  clearly  reflect  income.  The  taxpayer  should  submit  his  returns 
to  the  Government  by  deducting  the  losses  in  the  year  in  which  they 
occur  and  by  asking  permission  to  transfer  them  to  a  later  period. 
This  section  refers  to  such  losses  as  theft  in  one  year  discovered 
in  the  next,  or  loss  of  a  vessel  in  one  year  not  known  of  until  the 
next.  It  does  not  refer  to  shrinkage  in  inventory  values  nor  drop 
in  the  market  value  of  stocks. 

Losses  cannot  be  taken  unless  a  transaction  is  completed. 
Thus  stock  purchased,  costing  $100  a  share  may  be  worth  $50  at 
the  end  of  a  taxable  period,  but  unless  sold,  no  loss  can  be  taken. 
If  stock  actually  becomes  worthless,  and  such  fact  can  be  proved, 
then  a  loss  may  be  taken  without  attempting  to  sell.  If  banks, 
pursuant  to  state  laws,  value  stock  on  their  books  at  market  prices, 
and  thus  show  a  loss,  no  deduction  thereon  is  allowed.  Brokers, 
however,  in  taking  inventories  of  stocks  on  hand,  may  compute  them 
at  the  market  price,  and  if  a  loss  results,  it  may  be  taken.  If  a 
person  sells  a  house  in  which  he  has  been  living  and  which  he  has 
been  holding  as  his  private  residence,  no  loss  is  allowed,  unless 
he  can  show  (Gov.  Decision)  that  he  originally  purchased  with  the 
intention  of  making  a  sale  later  at  a  possible  profit.  Such  loss 
is  not  incurred  in  business  or  as  the  result  of  theft,  fire,  cas- 
ualty, etc.  If  property,  such  as  machinery,  equipment,  etc.,  loses 
its  value  through  being  replaced  by  inventions,  or  otherwise 
rendered  useless,  and  such  circumstance  was  in  all  probability 
practically  impossible  to  foresee,  a  loss  may  be  allowed. 
Gambling  losses  are  not  deductible,  as  illegal  losses  may  not  be 
taken.  Wherever  gambling  is  legal,  losses  may  be  taken. 

If  farmers  keep  inventories  of  live  stock  owned  euid  crops,  any 
losses  through  death  of  stock  or  shrinkage  of  crops  ceuinot  be  taken, 
as  such  losses  will  be  reflected  in  the  reduced  inventory  values 
at  the  close  of  the  taxable  year.  If  no  inventories  are  kept  farm- 
ers may  deduct  losses  on  stock  killed  or  crops  destroyed  which  have 
been  purchased,  less  any  depreciation  taken  on  the  stock  suid  less 
2Uiy  insurance  received  on  either  group.  Goods  grown  on  farms,  and 


never  included  in  inventories,  cajinot  be  considered  a  loss  when  de- 
stroyed, as  they  were  never  included  in  gross  income.   When  animals 
die  which  have  been  fed  for  purposes  of  sale  as  food  animals,  any 
foods  furnished  them,  the  value  of  which  is  now  lost,  cannot  be 
taken  as  a  deduction,  because  if  such  items  of  food  are  grown  on 
the  farm  they  have  not  been  included  in  income  and  if  purchased 
may  be  deducted  as  such.   If  ordinary  assets,  such  as  buildings, 
autos,  garages,  etc.,  are  destroyed  on  farms,  their  value  may  be 
taken  as  losses,  subject  to  the  conditions  previously  enumerated. 

BAD  DEBTS:  Bad  debts  may  be  taken  as  losses  (1)  when  they  have 
previously  been  included  in  income,  and  (2)  when  they  have  actually 
become  bad  debts  and  can  be  proved  as  such.   If  a  company  sets  up 
a  Reserve  for  Bad  Debts  on  its  books,  thereby  taking  anticipated 
losses,  the  amount  set  up  in  the  Reserve  is  not  ordinarily  an  allow- 
able deduction.  All  the  circumstances  surrounding  a  bad  debt 
should  be  taken  into  consideration  in  deciding  whether  a  debt  is 
actually  worthless  or  not.  Bankruptcy  may  or  may  not  signify  that  a 
debt  is  worthless;   disappearance  of  debtor  may  not;   inability  to 
collect  may  not;  however,  all  these  facts  may  assist  materially  in 
deciding  whether  or  not  a  debt  is  uncollectible. 

However,  a  Reserve  for  Bad  Debts  may  be  used  starting  with  the 
year  1921,  as  follows:   If  a  taxpayer  has  been  using  a  Reserve  for  Bad 
Debts  and  it  appears  on  the  books  as  of  January  1,  1921,  the  taxpayer 
should  charge  against  such  Reserve  during  1921  any  actual  bad  debt 
losses  and  should  then  subtract  as  a  tax  deduction  only  the  addition 
to  the  Bad  Debt  Reserve  at  the  end  of  the  year.   If  a  concern  has  not 
previously  used  a  Bad  Debt  Reserve  it  may  now  adjust  its  books  as  of 
January  1,  1921,  by  setting  up  a  Bad  Debt  Reserve,  but  not  deducting 
it  in  its  tax  return.   Such  taxpayer  shall  also  then  charge  the  actual 
bad  debt  losses  against  the  newly  established  reserve  during  the  year, 
and  then  deduct  on  his  books  and  in  the  tax  return  the  addition  to  the 
Bad  Debt  Reserve  at  the  end  of  the  year.   If  the  taxpayer  adopts  the 
policy  of  using  the  Reserve  he  shall  be  required  to  continue  the  pol- 
icy in  subsequent  years.   It  will  also  be  necessary  to  give  a  state- 
ment to  the  Commissioner  showing  the  amount  of  sales,  and  the  balances 
of  receivable  accounts  at  the  beginning  and  end  of  the  year,  and  other 
factors  which  the  taxpayer  is  using  as  a  means  for  computing  his  Bad 
Debt  Reserve  in  his  particular  line  of  business. 

Hereafter,  fractional  bad  debt  losses  may  be  taken.   If  so,  any 
amount  collected  in  excess  of  the  balance  not  charged  off  shall  be 
taxable  income  as  of  the  time  received.   Thus,  $800.  of  a  $1000.  bad 
debt  loss  is  charged  off;  later  $300.  is  collected, —  $100.  of  which 
is  considered  taxable  income,  as  the  books  contain  a  $200.  balance  on 
which  an  amount  of  $300.  has  been  collected.   (Act  of  1921.)   (Treas- 
ury Decision  3261 — Dec.  20,  1921.) 

A  mortgage  may  be  charged  off  as  a  bad  debt  if  uncollectible. 
However,  if  a  mortgagee  buys  property  covered  by  a  mortgage  to  him, 
no  subsequent  loss  can  be  taken.   Thus,  "A"  had  a  $3,000  mortgage 
on  "B's"  house,  which  the  latter  could  not  pay;  foreclosure  proceed- 
ings followed  at  which  "A"  purchased  the  house  for  $2,500,  the 


-34- 

money  being  immediately  turned  over  to  himself  as  mortgagee.   "A" 
cannot  now  deduct  the  $500  cash  loss,  as  the  $3,000  mortgage  evi- 
dently was  t£iken  against  a  house  worth  at  least  $3,000  euid  "A"  now 
has  the  house.  Any  loss  suffered  by  "A"  upon  sale  to  a  third  party 
may  be  taken. 

A  company  buying  accounts  receivable,  some  of  which  prove  un- 
collectible, may  charge  off  the  cost  price  only  against  the  losses, 
£uid  not  the  face  value  of  the  accounts.  Worthless  securities 
charged  off  under  bad  debts  should  be  proved  valueless. 

DEPRECIATION,  AMORTIZATION  AND  DEPLETION:  Depreciation  is 
defined  by  the  Government  as  the  lessening  in  value  of  an  asset, 
through  exhaustion,  wear,  tear,  decay,  decline,  obsolescence 
through  the  normal  progress  of  the  art  in  any  particular  line, 
and  inadequacy  due  to  the  growing  and  increasing  needs  of  a  busi- 
ness. Any  depreciation  should  be  spread  as  uniformly  as  possible 
over  the  life  of  sui  asset,  in  accordance  with  good  accounting 
practices.   The  depreciation  should  be  based  on  the  cost  of  the 
asset,  less  scrap  value  and  the  estimated  life.  In  the  case  of 
property  bought  prior  to  the  enactment  of  the  Income  Tax  Law,  and 
which  contained  exi   appreciated  value  as  of  March  1,  1913,  depre- 
ciation is  to  be  applied  against  the  newer  value.  Thus,  if  a 
house  cost  $10,000  in  1910  and  was  worth  $12,000  on  March  1,  1913, 
depreciation  is  to  be  applied  against  the  $12,000  value. 

In  the  case  of  intangible  assets  depreciation  is  permitted  only 
if  such  assets  are  limited  in  time.   Thus,  patents,  copyrights, 
franchises  and  licenses,  usually  limited  in  time,  are  depreciable, 
although  intangible.  Purchased  good  will  and  similar  intangible 
items  may  not  be  depreciated. 

The  Government  has  given  out  no  set  rates  of  depreciation; 
a  reasonable  percentage,  depending  upon  the  facts  in  each  case, 
being  allowed.  However,  a  few  of  the  following  rates  have  been 
approved  by  the  Government. 

Depreciation  on  brick  buildings  -  2  per  cent; 

Depreciation  on  wooden  and  freune  buildings  -  3  to  5  per  cent; 

Depreciation  on  office  furniture  and  fixtures  -  10  to  15  per  cent; 

Depreciation  on  auto  trucks  -  20  to  25  per  cent; 

Depreciation  on  ships  and  vessels  -  3  1/3  per  cent 

A  few  special  rates  have  been  established  by  the  Government  for 
particular  assets  in  certain  lines  of  business,  but  even  these  may 
be  altered  by  the  facts  in  any  case,  if  they  are  shown  to  be  un- 
reasonable . 

Amortization  is  the  writing  off  of  value  (almost  the  saune  as 
depreciation)  of  assets  acquired  after  April  6,  1917  and  used  to 
assist  in  the  prosecution  of  the  war.  Such  sunortization  applies 
chiefly  to  vessels,  buildings,  machinery  and  the  like,  purchased 
after  the  war  began,  for  the  purpose  of  directly  or  indirectly 
assisting  the  Government.  Amortization  is  permitted,  starting  with 


-35- 

January  1,  1918,  and  should  consist  of  writing  off  the  asset  from 
the  value  as  of  that  date  up  to  the  time  the  asset  was  sold,  dis- 
carded or  discontinued  on  war  work.  Thus,  if  a  corporation  erected  a 
special  building  in  1917  and  depreciated  it  a  little  for  the  rest  of 
that  year,  and  sold  such  an  item  in  June  1919,  or  discarded  it  at 
that  time,  it  should  amortize  the  value  of  the  asset  as  of  January 
1,  1918,  down  to  its  saleable  or  discarded  value  as  of  June  1919, 
over  the  period  January  1,  1918  to  June  1919.   If,  on  the  other  hand, 
such  factory,  machinery,  vessel  or  other  asset,  is  used  in  ordinary 
business  after  completion  of  Government  work,  it  should  bs  amortized 
down  to  its  post-war  value  to  the  concern  in  its  ordinary  nonnal 
business.  What  constitutes  "the  post-war  normal  value"  of  war 
facilities  used  in  ordinary  business  is  often  a  difficult  question 
to  decide.   Amortization  written  off  for  the  years  1918  to  1921, 
inclusive,  may  be  reviewed  by  the  Government,  or  open  to  reconsid- 
eration by  request  of  the  taxpayer,  up  to  March  3,  1924. 

Depletion  is  the  lessening  of  value  of  an  asset  whose  decreas- 
ing worth  cannot  be  retarded  by  repairs  and  replacements  a.id  which, 
itself,  cannot  be  renewed.   Depletion  is  applied  to  timber  lands. 
oil  and  gas  wells,  coal  mines,  etc.   In  the  case  of  property  ac- 
quired before  March  1,  1913,  the  depletion  rate  may  be  applied 
against  the  property  value  as  of  that  date.   If  an  individual  dis- 
covers a  mine  which  cost  him  but  a  nominal  figure,  he  is  allowed  to 
teike  depletion  against  the  fair  market  value,  as  of  the  time  of 
discovery,  but  in  no  event  shall  such  depletion  exceed  the  pro- 
fits made  in  any  one  year.   Both  depletion  and  amortization  open 
up  special  fields,  which  oftentimes  require  handling  by  special- 
ists only.   Those  interested  in  these  two  particular  phases  of 
deductions  against  income  taxable  should  read  Regulations  45, 
1921  issue,  pages  76  to  100,  and  the  new  Law,  Section  214,  Sab- 
divisions  9  and  10. 

CHARITABLE  CONTRIBUTIONS:   Charitable  contributions  or  gifts 
are  donations  to  corporations,  associations,  funds  or  foundations, 
operated  for  religious,  charitable,  scientific,  literary  and  edu- 
cational purposes;  to  posts  of  the  American  Legion  and  Women's 
Auxiliary  Units,  to  the  Vocational  Rehabilitation  Fund,  and  the 
Federal  and  State  Governments  when  used  for  exclusively  public  pur- 
poses.  A  taxpayer  is  allowed  to  deduct  for  such  donations  an 
amount  not  to  exceed  15%  of  his  taxable  income  as  computed  without 
the  benefit  of  the  above,  and  without  first  taking  out  his  personal 
exemption.   Thus,  "A"  received  a  salary  of  $12,000  and  is  married. 
During  the  year  he  donated  to  his  Church  $500,  to  the  Y.M.C.A. 
$400,  to  Boston  University  $500,  and  to  the  Red  Cross  $500. 
He  paid  out  in  charitable  contributions  $1,900.  However,  15%  of 
$12,000,  or  $1,800,  is  the  maximum  deduction  allowed  for  such  con- 
tributions, and  therefore  only  the  latter  amount  should  be  subtrac- 
ted, leaving  a  taxable  income  of  $10,200  which  balance  is  subject 
to  the  Normal  Tax,  after  deducting  his  personal  exemption,  and  to 
the  Surtax,  the  same  as  any  other  similar  taxable  anount. 

Donations  to  the  American  Legion,  Women's  Auxiliary  Units,  and 
Federal  and  State  Governments  are  deductible  beginning  in  1921; 


-36- 


also  donations  to  funds  or  foundations.  Heretofore,  the  donations 
must  have  been  made  to  corporations  and  associations  operated  for 
certain  beneficial  purposes  or  to  the  Vocational  Rehabilitation 
Fund  to  be  deductible.   Corporations,  associations,  foundations, 
etc.,  receiving  donations  must  not  permit  profits  to  inure  to  the 
benefit  of  any  individual  stockholders,  or  deductions  of  contribu- 
tions to  them  will  not  be  allowed. 


cannot  be  deduc- 
to  whom  deduct- 
return  an  item- 
Partnerships 
contributions ,  but 
ion  purposes,  each 

on  which  he  in- 
the  partnership. 


Contributions  to  needy  individuals  or  families 
ted,  as  they  are  not  included  in  the  organizations 
ible  gifts  may  be  given.   In  a  person's  income  tax 
ized  list  of  charitable  contributions  must  be  given 
or  corporations,  as  such,  cannot  deduct  charitable 
after  a  partnership  reports  its  income  for  informat 
partner  may  then  deduct  from  his  distributive  share 
tends  to  pay  a  tax,  his  share  of  donations  made  by 
claiming  same  as  individual  donations. 

By  Government  Decisions,  all  contributions  to  churches  come 
within  the  15%  deduction,  even  where  the  money  received  is  used  for 
building  a  new  church,  or  to  form  a  social  club  within  a  church,  or 
to  finance  foreign  missions  and  foreign  religious  undertakings,  as 
all  such  expenditures  in  general  tend  to  promote  religion.   Con- 
tributions to  religious  and  charitable  organizations  in  foreign 
countries  may  be  deducted.   (Gov.  Decision.)  Donations  to  the 
Red  Cross  and  similar  military,  charitable  organizations  may  be 
deducted. 

For  the  year  1921  a  new  method  of  computing  deductions  in  the 
case  of  property  seizures  has  been  devised,  to  the  effect  that  the 
proportion  which  the  amount  expended  bears  to  the  receipts  shall 
be  applied  against  any  gain  and  the  result  allowed  as  a  deduction. 
Thus,  if  a  house  was  worth  $4,000  and  was  compulse rily  taken  from 
the  taxpayer,  through  Right  of  Eminent  Domain,  destruction,  or 
otherwise,  and  he  was  compensated  to  the  extent  of  $5,000,  it 
would  be  necessary  for  him  to  report  $1,000  profit.  However,  if 
he  then  attempts  to  replace  the  property  substantially  in  kind,  he 
is  allowed  as  a  deduction,  the  ratio  above  defined.   Thus,  if  it 
costs  him  $4,200  to  replace  the  house  worth  $4,000  and  for  which 
he  received  $5,000,  he  is  allowed  as  a  deduction  42/50  of  the 
$1,000  gain. 

For  the  year  1921,  under  the  new  Act,  losses  of  one  year  may 
be  used  to  offset  gains  of  any  subsequent  year.   Thus,  a  loss  in 
1921  may  be  used  to  offset  a  gain  in  1922.   For  example,  if  a  tax- 
payer has  a  loss  of  $20,000  in  1921  and  a  gain  of  $30,000  in 
1922,  he  reports  a  taxable  gain  of  only  $10,000  for  1922.   It  must 
be  carefully  noted  that  such  losses  are  effective  only  for  subse- 
quent years  and  that  the  rule  is  effective  beginning  with  the  year 
1921. 

For  a  fiscal  year  ending  in  1921,  that  proportion  of  the  loss 
assignable  to  the  period  after  January  1st  may  be  used  to  offset 
subsequent  fiscal  year  gains.   Thus,  a  concern  loses  $24,000  for 
the  period  April  1,  1920  to  April  1,  1921.   3/12  of  this  loss  may 
be  assigned  to  the  period  after  January  1,  1921,  or  $6,000.  This 
$6,000  may  be  used  to  offset  any  gains  for  subsequent  fiscal  years. 


LECTURE  4. 

Questions  to  be  Answered. 

1. 

An  individual,  president  of  a  corporation  owning  eight  chain 
stores,  uses  his  automobile  every  day  in  going  from  his  home  to 
Store  No.  1.  He  then  uses  it  the  remainder  of  the  day  in  driving 
from  one  store  to  another.  He  returns  to  his  home  in  it  each 
evening.   He  uses  it  Sundays,  but  not  for  business  purposes. 
State  in  general  what  deductions,  if  any,  you  would  allow  for 
the  up-keep  of  such  automobile.   (Question  decided  by  recent  Gov. 
Decision. ) 

2. 

A  dealer  in  fur  coats  paid  $4,000  during  the  year  as  duties 
on  imported  furs,  which  amounts  he  did  not  deduct  from  cost  of 
goods  sold  in  his  business.  He  paid  $3,000  more  as  luxury  tajces 
to  the  government  for  the  same  coats  sold  by  his  store  to  cus- 
tomers. He  paid  $30  import  tax  on  a  fur  coat  purchased  in  Eu- 
rope by  his  wife.   He  paid  $50  tax  to  the  manufacturer  on  a 
piano  purchased  for  his  own  home.   State  what  he  may  deduct  as 
allowable  expense. 

3. 

An  individual  paid  the  following  taxes  during  the  year:  $70 
Federal  Income  Tax,  $60  State  Income  Tax,  $5  Poll  Tax,  $20 
license  fee  for  truck  in  his  business,  $15  license  fee  for  auto- 
mobile for  private  use,  $8  in  soda  taxes  and  amusement  taxes, 
$28  in  railroad  taxes,  and  $70  for  a  license  to  sell  certain 
drugs  within  a  state.  What  amount  may  be  deducted  from  his  gross 
income? 

4. 

A  taxpayer  owned  two  houses,  each  containing  two  tenements. 
In  house  No.  1,  his  own  family  occupied  one  of  the  tenements. 
His  income  from  House  No.  1  was  $35  rent  a  month,  from  house 
No.  2,  $80  rent  a  month.  On  house  No.  1,  during  the  year,  he 
paid  out  the  following.  Taxes  $60,  Insurance  $70,  Interest  on 
Mortgage  $40,  Repairs  $25,  Water  Bills  $8.   On  house  No.  2,  he 
paid  out  Taxes  $65,  Insurance  $75,  Interest  on  Mortgage  $45, 
Repairs  $80,  and  other  costs  $20.  His  salary,  which  is  the  only 
income  from  sources  other  than  the  rents  received,  is  $4,000  a 
year.  He  is  married  and  supporting  a  wife  and  one  child.   Compute 
his  tax. 

5. 

"A"  donates  the  following  amounts  during  the  year:  $500 
to  Boston  College,  $50  to  Post  200-American  Legion,  $40  to  a 
club  to  which  he  belongs  for  Promoting  the  Study  of  the  Spanish 
Language,  $50  to  the  University  Club,  $25  to  the  Boston  Herald's 
coal  Fund,  $45  to  a  friend  of  his  in  need,  and  $100  to  the 
Massachusetts  Hospital  for  the  Blind.  Which  amounts  may  he 
deduct  from  Gross  Income? 


LECTURE  5. 

Preparation  of  Form  1040  A. 

Income  Tax  Return  of  Individual 
with  Net  Income  of  Less  Than  $5,000 
«  Under  the  1921  Act, 

Form  1040  A  is  used  in  preparing  the  return  of  an  individual 
with  net  taxable  income  of  less  than  $5,000  and  subject  to  the 
Normal  Tax  only.   It  consists  of  six  printed  sheets:  Pages  1  and 
2  of  the  Return,  and  pages  1  and  2  of  the  Instructions.  The  in- 
structions are  a  condensed,  comprehensive  summary  of  the  tax  law, 
and  should  be  carefully  reviewed. 

Page  1  of  the  tax  return  reports  the  income  and  deductions 
of  the  taxpayer.   The  income  items  are  properly  classified  on  the 
first  page.   Any  of  the  items  requiring  supporting  Schedules  are 
so  designated;  that  is,  to  the  left  of  each  line  of  income  is 
either  a  blank  space  or  a  letter.  Where  a  letter  appears,  such 
as  A,  B,  C,  D,  this  signifies  that  a  supporting  Schedule  on  page 
2  of  the  Return  is  required  in  order  to  explain  in  detail  the  net 
income  on  any  particular  line.  All  income  items  are  classified  on 
lines  1  to  8  of  the  Return,  and  totalled  on  line  9. 

Lines  10  to  15  report  allowable  deductions.   It  should  be 
noted  that  the  deductions  on  these  lines  are  the  personal  ones 
allowed  individuals,  such  as  personal  interest,  taxes,  and  con- 
tributions paid  out.   The  use  of  each  line  can  best  be  understood 
by  the  writing  of  an  actual  Return. 

Problem  Illustrating  Use 
of  Form  1040  A  Under  the  1921  Act. 

The  taxpayer,  Mr,  Harry  J.  Turner,  1400  Allston  Ave.,  Brook- 
line,  Mass.,  supporting  a  wife  2uid  child  -  age  ten  years,  submits 
the  following  information  to  your  office  and  requests  that  you 
prepare  his  tax  return  for  the  year  1921. 

From  Jan.  1  to  March  31,  1921,  he  was  in  the  active  military 
service  of  the  United  States,  receiving  $150  a  month.  Upon  leav- 
ing the  service  he  received  a  bonus  of  $100  from  the  State  of 
Massachusetts.  During  the  first  five  months  of  the  year  his  wife 
was  stenographer  for  the  City  of  Boston  at  $100  a  month,  and  in 
November  and  December  received  the  sajne  rate  of  salary  from  the 
Morgan  Memorial,  a  charitable  organization,  itself  tax-exempt. 

Mr.  Turner  resumed  his  former  business  in  April,  1921,  at  500 
Washington  St.,  Boston,  Mass.,  the  business  consisting  of  buying 
typewriter  supplies,  packing  and  stamping  same  in  his  own  name  and 
selling  them  as  his  own  product.  His  profit  and  loss  statement  ap- 
pears as  follows: 


Sales  of  typewriter  supplies  for  1921  (8  mos.) 

Cost  of  Sales: 

Materials  Bought  (8  mos.)  $10,221.40 

Goods  on  Hand,  April  700.00 

Labor,  Packing  4,850.35 

Packing  Materials  1,201.50 

Incidental  Costs  45.00 


$18,510.10 


Total 

17 

,018.25 

Goods  on  Hand, 

Dec.  31 
Sold 
Sales 

3 

,510.00 

13 , 508 . 

Cost  of  Goods  i 

13 

,508.25 

.25 

Gross  Profits  on  ; 

$5,001. 

,85 

Less  Expenses: 

Salaries 

$3 . 000 . 00 

Rent 

720 . 00 

Interest 

55.00 

Taxes 

105 . 00 

Depreciation 

100 . 00 

Repairs 

40.00 

Bad  Debts,  Actual 

119 . 00 

Telephone 

78.50 

Electric  Light 

21.00 

Advertising 

115.00 

Stationery 

55.00 

Postage 

25.00 

Office  Expense 

12.85 

4.446. 

4 

,446.35 

,35 

Profit  for  8  mos. 


$555 . 50 


Books  were  kept  on  an  accrual  basis.   Included  in  salaries  are 
$1,500  paid  to  Mr.  Turner  himself,  and  a  $50  bonus  paid  to  him. 

Mr.  Turner  also  had  an  interest  in  a  partnership  during  1921, 
called  the  Washington  Manufacturing  Co.,  in  which  he  was  entitled  to 
one-fifth  of  the  profits.   In  its  return  of  information  to  the  In- 
come Tax  Unit,  the  partnership  shows  a  profit  of  $6,174.50.   Included 
in  the  total  income  is  an  item  of  $120,  interest  received  at  6% 
on  $2,000  worth  of  'tax-free  covenant"  bonds,  and  income  from  a 
$1,000  4f%  Victory  Note,  owned  part  of  the  year,  amounting  to  $29.50. 
The  corporation  issuing  the  bonds  paid  a  2%  tax  on  the  interest  be- 
fore sending  the  $120  to  the  partnership.   Mr.  Turner  received  only 
$1,000  in  cash  from  the  partnership,  during  1921. 

Other  business  transactions  reported  by  Mr.  Turner  were  as 
follows:  -  At  the  beginning  of  the  year  he  owned  two  houses,  in  one 
of  which  he  lived  with  his  wife  euid  10  year  old  child.  The  other 
house  cost  him  $3,800  in  1910,  but  he  could  prove  satisfactorily 
that  it  was  worth  $4,000  on  March  1,  1913,  the  date  the  Income  Tax 
Law  became  effective.  From  March  1,  1913  to  date  of  sale,  he  de- 


preciated  the  house  at  the  rate  of  2^%  per  year.  He  spent  $200 
on  it  in  1921  for  additions  and  betterments.  On  Sept.  1,  1921,  he 
sold  the  house  for  $4,110.  Up  to  that  time,  the  property  had  been 
rented  for  $45  a  month,  and  the  following  amounts  had  been  expended 
on  it:  -  for  repairs,  $30;,  for  water  bills,  $20;  and  for  taxes,  $90. 

He  bought  ten  shares  of  N.  E.  Telephone  Stock  in  1919  at  99, 
and  sold  them  at  102  in  1921,  paying  a  commission  of  $1.50  with 
each  transaction.  He  built  a  garage  in  1921,  at  a  cost  of  $1,000, 
had  rented  it  two  months  at  $20  per  month,  and  had  paid  out  in 
taxes  $25,  when  it  was  destroyed  by  fire.  He  estimated  that  de- 
preciation amounted  to  but  $5  up  to  the  time  of  the  fire.  The 
building  was  insured,  and  he  received  $895  from  the  insurance 
company . 

Concerning  matters  not  connected  with  his  business,  Mr.  Turner 
reported  as  follows:  -  He  bought  a  new  automobile  in  September 
for  $1,200;  it  was  later  stolen,  and  he  was  allowed  $1,000  insur- 
ance by  the  insurance  company.  He  paid  $60  in  interest  on  personal 
loans,  a  $5  poll  tax,  a  $20  State  Income  Tax,  and  a  $40  Federal 
Income  Tax,  also  $20  for  a  license  for  the  stolen  automobile,  which 
was  not  at  any  time  used  for  business  purposes.  He  spent  $40  for 
repairs,  $60  for  insurance,  $30  for  interest  on  mortgage,  and  $50 
for  taxes  on  the  house  occupied  by  himself,  wife  and  child.  He  was 
able  to  submit  satisfactory  proof  that  taxes  for  baseball,  theatre 
and  other  amusement  tickets  totalled  $7.50  for  the  year. 

He  gave  out  in  charity  during  the  year,  $50  to  the  American 
Legion,  Post  101,  and  $25  to  the  Women's  Auxiliary,  also  $17.50  to 
the  Tremont  Temple  Church  and  $20  to  the  Christmas  Fund  of  the  same 
church,  and  $30  to  John  Blake's  needy  family,  located  several 
streets  from  him.  He  loaned  $38  to  J.  White  while  in  the  army, 
taking  his  note  for  same,  but  has  recently  learned  that  Mr.  White 
was  killed  in  the  service. 

He  owned  stock  on  which  he  received  $200  in  stock  dividends 
and  $539.10  in  cash  dividends.  Bank  interest  received  for  the 
year  totalled  $20.17.  Mr.  Turner's  uncle  died  during  December, 
and  he  received  $3,000  insurance  as  beneficiary,  also  $5,000  in 
real  estate. 

From  the  foregoing  facts  and  figures,  -  Form  1040  A  is 
written  as  follows: 


V'orm  1<M0A 

u.  8.  Internal  Revenue 


FILE  RETURN 

WITH  THE 

COLLECTOR  OF 

INTERNAL 

REVENUE  FOR 

YOUR  DISTRICT 

ON  OR  BEFORE 

MARCH  15»  1922 


-41- 

INDIVIDUAL  INCOME  TAX  RETURN 

FOR  NET  INCOMES  OF  NOT  MORE  THAN  $S,000 
For  Calendar  Year  1921 

Or  fcr  pcrM  k|M  ^ 1929,  ml  cmM ,  1»I 

PRINT  NAME  AND  ADDRESS  FLAINLY  BELOW 

Harry  J.  Turner 


(Name.) 

1400  Allston  Ave. 

(Street  aad  number  or  rural  route.) 

Brookllne^  IJasgf 

(Post  office.) 


(County.) 


(State.) 


OCCUPATION,  PROFESSION,  OR  KIND  OF  BUSINESS  3f.E^...?lJ5.?^TA^±T.. SUpplleS    . 


Pe  ■•!  write  '■  lias  »yKe 
FIRST  PAYMENT 


(Caahier'e  Stamp) 


CASH     CHEOC     M.CX 


Sctle- 
raclia 

13 


14 

18 

16 

17 

18 
18 


8 


11 


itmi) 


A 

B 
C 
D 


20 

21 

22 

E 

23 

F 

24 

F 

25 

F 

TtCCtVCfL 


INCOME. 

1.  SaUries,  Wages.  CommiflBions,  etc. 

(State  name  aoa  addrees  of  person  from  whom  received.) 

V.*..A»...A?tM..lJ^7.. 1 450 e 00.,  I  _ 

M<?r£jm..M.em.Qr.lal..Xiy^..wif.©..). 2.Q.Q^.QjCL..  ._ 

2.  Interest  on  Bank  Deposits,  Notes,  Mortgages,  and  Corporation  Bonds 


e 


3.  Income  from  Partnersliipe,  Fiduciaries,  etc.     (State  name  and  address  of  {Mutnersh^,  etc) 

4.  Rents  and  Royalties . 


S.  Profit  (or  loss)  irom  Business  or  Profession  (not  including  income  from  partneiships).. 
«.  Profit  (or  loss)  £tom  Sale  of  Real  Estate 

7.  Profit  (or  loss)  from  Sale  of  Stocks,  Bonds,  etc . _. 

8.  Other  Income  («xoept  dlridcods  from  domesUo  carporatioos  snd  iDtsrast  <tt  oblJ^Uoos  U  lbs 

U.S.)    (SUtonstanotlnoome) 

(o) 

(») 


450 


2S)£i. 


SO 


_63 


2105 
760 


2.Z. 


00. 

.QQ 
17 


.00. 

.35. 
.5.0 

00 

00 


» 


•*••*••• 


Total  Ihoomk  in  Itbhs  1  to  8  (less  losses  shown  above,  if  any) __. 

DEDUCTIONS. 

10.  Interest  Paid  (not  including  interest  deducted  above) ... 

11.  Taxes  Paid  (not  including  taxes  deducted  above)  

12.  Losses  by  Kre,  Storm,  etc 

IS.  Contributions 

14.  Bad  Debts  (not  including  bad  debts  deducted  above) 

15.  Other  Deductions  Authorized  by  Law 

1«.  Total  of  Imu  10  to  15 

17. Taxable  Nct  Imcom»  (Item  9  minus  Item  16) 


I   90 
lOS 


...2.0.0. 
..HZ. 
.....3S.. 


.QQ. 
50 

00 


.QQ. 
0 


4855 


543 


00 


4312 


00 


00 


COMPUTATION  OF  TAX. 


IS.  Netlncome  (Item  17  above). 


19.  Less  Personal  Exemption  and  Credit 
for  Dependents 


»..43.l.a    0(   21.  Tax  Dne  (4  J{  of  Item  20). 


29 


cd 


^^  ,22.  T^eee:  Tax  Paid  at  Source 

.Vvl}  23.  iBoom*  and  praSta  Usm  paid  to  • 
foraicn  oouaUy  or  iKWMaioa  of  tb* 
UoiUdSUtM  (attach ForxD  llie) 


»...^.a 


20.  Balance  (Item  18  minus  Item  19) >..1;412 

ChccLt  win  be  accepted  if  piTiUs  at  par  al  CoDector't  Ofic*. 


v(||  24.'  Balance  Due  (Item  21  minus  22  and  23).. 
2S.  Tax  Paid  when  Filing  Return 


56 


56 


.48 


48 


QO 


9*«*«M«*«w**«|*««k^a9 


»— lien 


SCHEDULE  A.-EXPLANATION  OF  ITEM  4.    (IUbU  mt%d  RoyaltlM.) 

LKindofproiMrty- 

3.  Cost,  or  March 
1, 1913,  value. 

3.  Amount 
received. 

4.  Repairs. 

5.  Depreciation 
and  aepletioa. 

0.  other 
expenses. 

7.  N«t  proat 
(or  loss). 

House 

.ipoo. 

1000 

00 

360 

00 

00 

30 

.0.0 
...0 

.66, 

6 

.67 
00 

110 
125 

Oi    Oi 
Ol    Ol 

.....1.53 
-  90 

.3.3 

Garage 

.00 

.40. 

00 

State  estimated  iile  at  prop4rty  and  how  yoa  jjgured  depreciati 

aCHBDULE  B.-EXPLANATION  OF  ITEM  «.    (Buein— or 


onHou sej-40  ?r s  _Rat e  2 'ViS  of  valugJJl^.L ^L-L?-j:g.^ 


ToU)  InMOMtniB  BialBMi  or  PntailMi  ________«. . . ........................... 

Total  BustaMM  Ktimbiw  (itsUtpMltoDx,  mo  Instiucttan  U) 

Kr  P>om(oaUM*)  (UpnatblMitiianasu>l,ozpUa).. 


8510 
16404 


2105 


1.0 
60 


60 


!Laxea.lQ.5.>^jejtaAxftJL4Q...^bad-.del>.tfl..ll9-..>ato&r_.exPii2a7^S&^iCQtaL^ 


SCHEDULE  C.-EXPLANATION  OF  ITEM  «.    (S«l«  of  RmI  Estate.) 

• '« 

1.  Klndorprop«ty. 

2.  DaU 
■oqulrtd. 

S.  Amount 
reoeiTed. 

4.  Coft 

5.  March  1, 1013, 
Talue. 

t.  Subsequent 
ImproTenMota. 

7.  Depredation. 

8.  Net  profit 
{<fr  loss). 

House     , 

_19.1.0  ,. 

_411Q. 

..58.0.Q.  .Q.O. 

..40.0.0: 

;o.o. 

800.  .00. 

:...BSQ:.m 

:..:im 

■m 

If  not  acquired  by  porchaia,  itate  bow  acquired 


SCHEDULE  D.-EXPLANATION  OF  ITEM  7.    (SaU  of  Stocks.  Bonds,  < 

.te.) 

1.  Kind  of  property. 

3.  DaU 
acquired. 

a.Oiak 

* 

4.Mai«lil,l»U, 
▼aim. 

5.  Amount 
rooeiyed. 

6.  Net  profit 
(or  loss). 

.J9a..S.t  I^lQpbOQO  Sitook 

.  1919 

991 

m 

• 

JLQIQ. 

.5.0 

27 

.D.Q 

If  not  acquired  by  parchaie,  state  how  acquired 


SCHEDULE  E.-EXPLANATION  OF  ITEM  13 

(.    (Lossos 

bjf  FlfOt  Stonn*  efo*/ 

1.  Kind  of  property. 

«.  Co<t.orllu«l> 
1, 1«13,  vnhu. 

S.  Depredation 
pravioutly  taken. 

4.  Salvafi  Talue. 

6.  Insoranoe. 

6.  Net  loss. 

loss 

of  Automobile  by  theft 

-.12.00. 

-QQ. 



0 

Q 

JSiQQ.m 

200 

..0.Q 

,,  1 1  1 1  II  1-1, 

.„. 

SCHEDULE  F.~EXPLANATION  OF  DEDUCTIONS  CLAIIMED  IN  ITEMS  1,  U,  14,  mM»A  18.) 

Item  15-Tremont  Temple  37e50  Amer>Leglon  50e  Women's  Auxe   25» 

jLt.e.ii.l4r:ir.iL.jabit^..-....AJOTy...^ 


^ciieluI§..£.-^iQje.ftojgLt...Qt.^^^^ 

Jj6ss   Inv 
J4ater.ials.l201.,50^pux,102 


1.  Are  vou  a  dtizen  or  *  2.  If  you  filed  n  return  for 

jeeldent  of  the  United  voo        1»»,  to  what  C««  lector's  -d^  ,,j.^y,        l.Toao 
StotesT XJSta...   office  was  it  sent? JuQ.vl  tPn^^..X4a^^.f.. 

4.  Was  a  separate  If  so^  state:  (b)  Name  and  address 


3.  Is  this  a  joint 
return  of  husband     v  a  r« 
and  wifer XM  S. . . 


5.  Were  yoa  married  and  living  with  husband    ^^  ^  6.  If  not,  were  you  on  the  last  day  of  your  taxable  period  supporting  one  or  more  persons   ^  *• 

or  wifeon  the  last  day  of  your  taxable  period? XbB living  in  your  household  who  are  closely  related  Io  you  by  blood,  marrl^e,  or  adoption? 

7t  How  many  dependent  persons  (other  than  husband  or  wife)  under  18  years  of  age  or  incapable  of  self-support  beeausa       f\^  ^ 
mentally  or  phyacaily  defective  were  reoeivinf  their  chief  support  from  you  on  the  last  day  of  your  taxable  period? lfJl.il. 


S.  State  amount  of  dividends  received  9.  State  amount  of 

from  domestic  corpomtions  (induding  interest  received  on 

dividends  received  through  partner-      fCCCQ    I  n  Victory    Liberty     e     qa 

ships,  fiduciaries,  etc.)  .^ t-gy-j?Jijii.V-.  Loon  4J%  Notes  ...  %.Qj»SP.W... 


10.  State  amount  of  Interest  received  on 
other  oblinUons  of  the  United  SUtes 
(except  Liberty  Bonds)  on  a  principal  /\ 

in  excess  of  S5.O0O $ U. 


I  8WKAB  (or  afllrm)  that  this  retara,  including  the  accompaQ  ving  schedules  and  statements  (if  any),  has  boon  •zamined  bv  me,  and,  to  the  best  of  ray  knowledge 
and  belief.  Is  a  true  and  completa  return,  mado  in  good  faith,  for'lho  taxable  period  as  stated,  pursuant  to  the  Revenue  Act  of  1931  and  the  R^ulations  issued  imder 
authority  tbereoL 


OlNtaniis 


by 


t. 


Mwt  b*  ststod  oo  «kto  Hm.) 


■  ^^^■■••■•»'i 


Sworn  to  tad  tubaolbed  bafora  ma  tlilf . 


.day  of. 


.,1922.< 


•CiadhrldMlor 


.) 


Ml-* 


•C  «C«ct  ■•Im't'atrrriaa  Oftih.) 


(TiUv.) 


rotum  must  bo  plidolf  martoad 


*9 


tho 


cl  ladividusl  sr 
•ff  tiM  vattini.) 


>-4M 


The  following  items  received  by  Mr.  Turner  are  not  taxable: 
Military  bonus  from  the  State,  salary  earned  by  the  wife  from  the 
State  or  its  subdivisions,  stock  dividends  received,  insurance  re- 
ceived as  beneficiary,  and  the  value  of  property  received  as  a  gift 
or  through  inheritance.   Therefore,  Mr.  Turner  does  not  report  as 
taxable  income  the  following  amounts:  -  $100  from  the  State,  $100  a 
month  for  5  months  received  by  wife  from  the  City  of  Boston,  $200 
in  stock  dividends,  $3,000  in  insurance,  and  $5,000  in  real  estate. 

The  taxpayer's  military  salary  received  for  the  year  1921  is 
taxable  under  the  new  law.   The  wife's  salary  from  the  Morgan  Me- 
morial, a  charitable  organization,  is  taxable,  for  although  such 
organization  itself  may  be  exempt,  earned  salaries  received  there- 
from are  taxable. 


Turning  to  page  1  of  the  Return,  it  is  made  out  as  follows: 
The  taxpayer's  military  salary  and  the  salary  of  the  wife  from  the 
Morgan  Memorial  are  placed  in  item  1.   Bank  interest  received  is 
entered  in  item  2. 

Partnership  income  is  entered  in  item  3.   The  partnership  shows 
a  profit  of  $6,174.50.   Included  in  this  is  $29.50  interest  on  a 
4f%  Victory  Note,  which  amount  is  subject  to  the  Surtax  only;  also 
included  therein  is  $120  interest  received  on  2%  tax-free  covenant 
bonds.   The  partnership  must  first  submit  to  the  Government  a 
Return  of  Information.   In  this  Return  of  Information  will  be  shown 
the  fact  that  the  total  profit  of  the  concern  was  $6,174.50.   It 
represents  several  kinds  of  income  as  follows:   $29.50  interest  on 
4f%  Victory  Notes,  $120  income  on  2%  tax-free  covenant  bonds,  and 
$6,025  ordinary  income.   The  partnership  information  return  also 
then  shows  that  the  taxpayer,  Mr.  Turner,  has  been  assigned  1/5  of 
each  kind  of  income,  so  that  he  should  report  $5.90  interest  on 
4-1%  Victory  Notes,  $24.00  interest  on  tax-free  covenant  bonds,  and 
$1,205  ordinary  income.   As  the  $5.90  is  subject  to  the  Surtax 
only,  it  is  reported  as  a  matter  of  information  at  the  bottom  of 
page  2  of  the  Return.   The  other  items,  $1,205  ordinary  income  plus 
$24  interest  on  2%  tax-free  covenant  bonds,  are  reported  in  item 
3  of  the  Return,  the  total  being  $1,229.   It  is  permissible  for 
the  taxpayer  to  report  $1,205  in  item  3  and  the  $24  in  item  8  under 
other  income. 

Item  4  records  income  from  rents  and  royalties.   The  tax- 
payer received  rent  on  the  house  sold  by  him  Sept.  1,  1921,  the 
amount  being  $360,  or  $45  per  month  for  eight  months.   This  amount 
is  reported  on  page  2,  Schedule  A,  along  with  any  expenses  which 
are  deductible  against  the  rent.   In  Schedule  A,  Bracket  4,  the 
taxpayer  reports  the  repairs  on  the  house,  and,  in  Bracket  5,  the 
depreciation.   In  Bracket  6,  he  shows  the  $90  taxes  and  the  $20 
in  water  bills,  or  a  total  of  $110.   The  repairs,  depreciation,  and 
other  expenses  are  then  subtracted  from  the  rental  income  and  the 
net  gain  from  rent  received,  shown  in  the  last  column  of  Schedule 
A.  As  a  matter  of  information,  the  cost  of  the  house  is  entered 
in  Bracket  2  of  Schedule  A.   In  the  same  Schedule,  on  the  next  line. 


the  taxpayer  shows  the  two  months'  rent  of  $40  received  on  the  gar- 
age erected  by  him  in  1921.  He  also  reports  the  $5  depreciation 
in  Bracket  5.   In  Bracket  6  are  shown  other  expenses,  which  in  this 
case  include  $25  in  taxes  and  $100  loss  through  fire.   This  loss  is 
obtained  by  taking  the  cost  of  the  garage  -  $1,000,  and  subtracting 
the  $5  depreciation,  leaving  a  value  of  $995.   Insurance  to  the  ex- 
tent of  $895  has  been  received,  there  being  a  final  loss  through 
fire  of  $100.   The  net  loss  on  the  garage  is  then  shown  in  Bracket 
7  of  Schedule  A.   The  rental  income  from  the  house  less  the  loss  on 
the  garage,  or  $63.33,  is  then  transferred  to  item  4,  page  1  of  the 
Return. 

Item  5  records  income  from  a  business  or  profession.  Mr. 
Turner's  typewriting  business  is  reported  in  this  item.   A  profit 
of  $555.50  is  shown  in  the  problem.  Mr.  Turner  has  taken  $1,500 
salary  and  a  $50  bonus  out  of  the  business.   If  these  ajnounts  are 
deducted  as  expense,  they  should  be  reported  as  salary  income  to 
Mr.  Turner  in  item  1.   Preferably,  salary  to  a  proprietor  from  his 
own  business  should  not  be  deducted  and  then  reported  in  item  1, 
but  should  be  omitted  from  both  items  5  and  1.   If  not  deducted 
from  the  income,  the  profit  is  increased  from  $555.50  to  $2,105.50 
(after  adding  $1,550).   Item  5  is  so  reported  in  the  Return. 

Item  5  is  supported  by  Schedule  B  of  page  2.   In  this  schedule 
the  taxpayer  merely  shows  the  total  sales  less  cost  of  goods  sold 
and  other  expenses,  giving  him  the  net  profit  for  the  business. 
In  the  same  Schedule,  and  if  necessary  in  Schedule  F,  the  various 
business  expenses  are  then  itemized. 

Item  6,  page  1,  reports  income  from  the  sale  of  real  estate. 
In  the  problem,  the  taxpayer  purchased  a  house  for  $3,800  in  1910, 
which  was  worth  $4,000  in  1913.   As  explained  in  Lecture  3,  the 
latter  value  is  used  as  cost  in  determining  profit  in  this  case 
and  also  in  computing  depreciation.   An  amount  of  $200  for  better- 
ments in  1921  increased  the  cost  of  the  house.   It  was  sold  for 
$4,110  in  1921.   Depreciation  at  date  of  sale  amounted  to  $850, 
computed  as  follows:  2%  on  $4,000  for  each  year,  or  $100  a  year; 
depreciation  for  1913,  ten  months,  $83.33;  for  1914  to  1920  inclu- 
sive, $700;  for  1921,  eight  months,  Sept.  1,  $66.67.   Summarized, 
the  figures  show:   Cost,  $4,000  plus  betterments  $200,  total  cost, 
$4,200,  less  depreciatiofl  $850  -  value  at  date  of  sale  $3,350 
($4,200  less  $850),  sale  price  $4,110,  profit  $760.   This  infor- 
mation is  then  shown  in  Schedule  C  in  the  following  order:   first, 
the  date  is  given,  then  the  sales  price,  then  the  March  1,  1913, 
value  plus  improvements,  followed  by  a  subtraction  of  the  depre- 
ciation, giving  the  net  profit  of  $760,  which  amount  is  then  trans- 
ferred to  item  6  of  page  1. 

Stock  sold  by  the  taxpayer  cost  $990  (10  shares  at  $99  each), 
to  which  is  added  the  brokerage  commission  of  $1.50,  giving  a  total 
cost  of  $991.50.  He  sold  the  stock  for  $1,020  (10  shares  at  $102 
each),  but  before  receiving  payment,  the  broker  again  deducted 
$1.50,  so  that  he  received  $1,018.50.  He  reports  the  purchase  and 


sales  prices  in  Schedule  D,  page  2,  as  shown,  the  profit  being  $27. 
This  amount  is  then  transferred  to  item  7,  page  1.   Items  1  to  7 
are  then  added,  giving  the  total  income  of  $4,855. 

As  previously  explained,  page  1  of  the  Return,  lines  10  to 
15,  records  personal  deductions  allowed  by  the  Law.   The  taxpayer 
paid  out  in  interest  $60  on  personal  loans  and  $30  on  a  mortgage  on 
his  private  residence.   These  are  both  deductible  and  reported  in 
item  10,  page  1.   The  taxpayer  paid  out  in  taxes,  not  already  de- 
ducted in  Schedules  A  and  B,  the  following:   $50  property  tax  on 
private  residence,  $5  poll  tax,  $20  State  Income  Tax,  $40  Federal 
Income  Tax,  $20  license  fee  on  stolen  automobile  not  used  for  busi- 
ness, and  $7.50  on  amusement  and  soda  taxes.   All  these  are  deduc- 
tible, except  the  $40  Federal  Income  Tax,  or  a  total  of  $102.50  in 
all.   The  amount  is  placed  in  item  11,  page  1. 

The  taxpayer's  automobile  was  stolen;  cost  new  $1,200,  in- 
surance received  $1,000,  loss  $200.   This  is  reported  in  item  12, 
page  1.  Losses  incurred  in  business  are  deductible,  also  other 
losses,  provided  they  are  the  result  of  fire,  storm,  casualty, 
theft,  etc.   The  taxpayer  loaned  $38  to  J.  White,  in  the  army  with 
him.   If  it  can  be  shown  that  such  a  loan  was  a  strictly  business 
one  which  the  taxpayer  in  the  course  of  time  expected  to  be  repaid, 
then  the  amount  may  be  deducted. 

Any  of  the  deductions  requiring  supporting  Schedules,  such 
as  items  12,  13,  and  14,  are  then  supported  by  Schedules  E  and  F 
of  page  2,  as  shown  in  writing  the  Return.   The  total  deductions 
are  then  subtracted  from  the  total  income,  giving  the  taxable  net 
income,  which  appears  in  item  17. 

At  the  bottom  of  page  1  the  tax  is  then  computed.  The  tax- 
able net  income  is  transferred  from  item  17  to  item  18;  from  it  are 
subtracted  exemption  credits  allowed  the  taxpayer.  The  taxpayer  is 
supporting  a  wife  and  child,  and  is,  therefore,  entitled  to  $2,900 
exemption;  $2,500  as  a  married  man  supporting  a  wife,  and  $400  for 
a  child  under  18.   This  amount  is  subtracted  from  the  net  income, 
giving  the  balance  subject  to  the  tax.  As  the  taxpayer  is  getting 
less  than  $5,000,  the  amount  is  taxed  at  the  rate  of  4%,  giving  a 
tax  of  $54.48,  the  Normal  Tax  of  the  taxpayer. 

However,  the  amount  paid  for  the  taxpayer  by  the  debtor  cor- 
poration against  which  his  partnership  holds  bonds,  amounting  to 
48  cents  (2%  of  $24  included  in  partnership  income)  is  now  de- 
ducted from  the  Normal  Tax.   That  is,  the  corporation,  as  already 
forwarded  to  the  Government,  has  advanced  payment  of  income  tax 
for  the  taxpayer,  2%  of  the  amount  of  interest  paid  on  its  bonds. 
When  the  48  cents  is  subtracted,  a  balance  of  $56  remains,  which 
is  the  normal  Federal  Income  Tax  of  the  taxpayer.   Certain  minor 
information  is  requested  at  the  bottom  of  page  2  and  from  the 
answers  given,  they  are  practically  self-explanatory.  As  noted 
at  the  beginning  of  the  problem,  the  stock  dividend  sheet  of  the 
taxpayer  is  not  taxed.  The  cash  dividend  received  by  him,  ampunt- 
ing  to  $539.10,  is  subject  to  the  Surtax  only.   As  the  taxpayer  is 
not  in  the  Surtax  class,  this  amount  is  entered  as  a  matter  of  in- 
formation at  the  bottom  of  page  2. 


LECTURE  5. 

Questions  to  be  Answered. 

Compute  on  Form  1040  A,  the  tax  of  Mr.  J.  J,  Right,  240  Tenth 
Ave.,  Brooklyn,  N.  Y.,  who  supports  in  his  own  home  a  wife,  one 
daughter  age  19,  and  another  age  16.  He  reports  on  an  Accrual 
Basis,  submitted  a  return  from  the  same  address  as  above  last  year, 
and  states  that  no  separate  income  has   been  received  by  his  wife. 

Mr.  Right  has  a  50%  interest  in  a  partnership,  which  during 
the  year  made  a  profit  of  $5,280,  of  which  he  has  received 
$2,000.  Included  in  the  $5,280  is  income  of  $100  interest 
from  $2,500  worth  of  Second  4%  Liberty  Bonds.  Mr.  Right  received 
a  salary  of  $1,200  from  the  partnership,  which  amount  was  deduc- 
ted from  its  profit  before  reporting  $5,280  as  its  income. 

The  taxpayer  owned  a  garage  from  which  he  received  $800 
in  rent  during  the  year,  and  paid  out  $40  in  taxes,  $75  in 
repairs,  and  $25  in  incidentals. 

He  owned  a  $500  bond  on  which  he  received  $35  in  interest,  and 
$500  in  stock  on  which  he  received  a  dividend  of  $25  Dec.  24,  but 
which  he  has  not  yet  cashed.  He  received  in  baidt  interest  $15. 

He  paid  out  the  following  during  the  year:  New  York  State 
Income  Tax,  $22,  Federal  Income  Tax  $40,  Interest  on  Personal  Loan 
$15,  Interest  on  loem  to  assist  in  purchasing  Bonds  owned 
$20,  Donations  to  his  Church  $30,  to  the  Red  Cross  $5,  Salvation  Army 
Christmas  Fund  $5,  Fraternal  Dues  $20,  Labor  Union  Contributions 
$10,  Special  Fund  for  Assistance  of  City  Poor  $12.  He  claims 
that  about  $8  represents  war  taxes  paid  by  him  on  baseball  tickets, 
soda  tickets,  theatre  tickets,  etc.  He  paid  dues  of  $10.00  for  the 
year  to  Post  200  of  the  American  Legion,  and  also  contributed 
$25  to  the  organization  as  a  gift. 


-47- 


LECTURE  6. 

Preparation  of  Form  1040. 

Income  Tax  Return  of  Individual 
with  Net  Income  of  more  than  $5,000. 

Form  1040  is  used  in  preparing  the  return  of  an  individual  with 
net  taxable  income  in  excess  of  $5,000,  which  is  subject  to  both  the 
Normal  Tax  and  the  Surtax.   It  consists  of  six  sheets:   pages  1  and 
2  of  the  Return,  1  and  2  of  the  Worksheet,  and  1  and  2  of  the  In- 
structions. The  latter  are  important  and  shbuld  be  read. 

Form  1040  closely  resembles  Form  1040A,  already  explained  in 
Lecture  5.  Any  differences  appearing  on  it  are  due  to  the  fact 
that  a  Surtax  must  be  computed  on  income  in  excess  of  $5,000,  and 
to  the  fact  that  a  greater  amount  of  information  is  demanded  of 
those  who  are  subject  to  both  taxes. 

Page  1  of  the  Return  closely  resembles  page  1  of  Form  1040A. 
Instead  of  items  1  to  8,  there  are  items  1  to  10,  the  difference 
being  due  to  reporting  dividends  on  stock  and  taxable  liberty  bond 
interest,  which  two  amounts  are  subject  to  the  surtax  only.   The 
deductions  beginning  with  line  12  are  the  same  as  in  form  1040A. 
The  total  tax  is  computed  at  the  bottom  of  the  first  page,  as  in 
the  case  of  1040A,  except  that  any  dividend  income  or  taxable  Li- 
berty Bond  interest  are  first  subtracted  from  the  net  income  before 
computing  the  Normal  T€ix. 


Page  2  0 
A  to  D  cover 
detailed  figu 
Schedule  F  of 
for  reporting 
uling  taxable 
porting  misce 
same  for  both 
for  reporting 


f  the  Return  contains  Schedules  A  to  G.   Schedules 
the  same  information  in  each  Form,  except  that  more 
res  are  required  on  these  Schedules  in  Form  1040. 

Form  1040  is  used  in  place  of  Schedule  E  of  1040A. 

losses.  Schedule  E  of  Form  1040  is  used  for  sched- 

Liberty  Bond  interest.   Schedule  G  is  used  for  re- 
llaneous  Schedules.   Briefly,  the  Schedules  are  the 
except  that  Form  1040  has  an  additional  Schedule 

Liberty  Bond  interest. 


Problem  showing  Use  of  Form  1040  and 
Containing  Illustrations  of  the  New  1921  Revenue  Act. 

Mr.  Louis  J.  Wright,  Architect  and  Engineer,  125  Broadway, 
New  York  City,  submits  the  following  report  to  your  office,  and 
asks  you  to  prepare  his  Return: 

Professional  Fees  received  and  accrued  for  1921  -  $27,500. 
Office  Expenses:   Salaries  $14,410,  Rent  $4,000,  Uncollectible 
Fees  $300,  Stationery,  Drafting  Supplies,  Postage,  etc.,  $1,200, 
Light,  Telephone,  etc.,  $125.04,  and  Traveling  Expenses  $597. 
Office  Equipment  cost  $2,000  in  1917  and  will  last  10  years.   A 
salary  of  $5,000  paid  to  the  taxpayer  is  included  in  the  $14,410. 


The  taxpayer  is  an  active  partner  in  the  partnership  named 
Joslyn  Construction  Co.,  New  York,  Construction  Engineers.  He  has 
a  one -third  interest,  and  has  received  a  salary  of  $3,000  from  the 
concern,  which,  after  deducting  partners'  salaries,  reports  as 
follows:   Profits  for  1921  -  $36,957;  included  in  profits  is  $297 
interest  on  4-|  Victory  Notes  purchased  during  the  year,  $303  in- 
terest on  tax-free  covenant  bonds  owned  by  the  concern  and  $120 
in  cash  dividends. 

The  partnership  books  show  that  the  profit  for  the  year  was 
obtained  in  the  following  manner: 


Contract  Fees 

Less:  Cost  of  Contracts 

Gross  Profit  on  Contracts 

Plus:  Other  Income 

Interest  on  4|%  Victory  Notes 
Interest  from  Bank  Deposits 
Interest  on  tax-free  Covenant  Bonds 
Dividends  on  Stock 

Total  Income 


$297.00 

50.00 

303 . 00 

120 . 00 


$275,670.00 
200,000.00 

75,670.00 


770.00 


$76,440.00 


Less :  Expenses 

Salaries  to  Officers 

Repairs  on  Equipment 

Taxes 

Bad  Debts 

Depreciation  on  Equipment 

Miscellaneous  Expenses 

Net  Profit 


$9,000.00 

500 . 00 

3,000.00 

2,500.00 

4,000.00 

20,483.00 


39,483.00 
$36,957.00 


The  taxpayer  owned  three  pieces  of  land  on  January  1  1921 
He  sold  one  lot  for  $14,000,  which  had  cost  him  $11,500  in  January 
1909,  and  was  worth  $10,500  on  March  1,  1913.   He  owned  a  second 
tract  located  in  Fcance,  on  which  he  paid  a  land  tax  to  the  French 
Government  of  $25.  He  owned  a  third  plot,  valued  at  $10,000  which 
was  leased  January  2,  1921,  for  ten  years.   The  lessees  immediately 
erected  a  building  thereon  during  1921  at  a  cost  of  $15,000,  of 
such  material  as  to  depreciate  about  2%  a  year.  His  rent  income 
for  the  land  was  $1,000  a  year,  and  his  taxes  thereon  were  $170 


The  taxpayer  also  received  a  salary  of  $3,000  as  Consulting 
Engineer  for  the  City  of  New  York,  and  the  following  other  income: 


Interest  on  $15,000  Liberty  Bonds  Z\% 
Interest  on  $15,000  Liberty  Bonds  4th  4^ 
Interest  on  $15,000  Victory  Notes  3f% 
Interest  on  $15,000  Victory  Notes  4^% 
Interest  on  City  of  Boston  Bonds,  $10,000 
Interest  on  Federal  Farm  Loan  Bonds,  $5,000 
Interest  on  tax-free  covenant  bonds 
Interest  on  bonds 
Interest  on  bank  deposits 

Dividends  from  European  Products  Co.  of  England 
Dividends  from  Michelin  Tire  Co.  of  France 
Stock  Dividend,  Cadillac  Motor  Co. 
Cash  Dividend,  United  Steel  Stock 


$525 . 00 
637 . 50 
562 . 50 
712 . 50 
600 . 00 
200 . 00 
200 . 00 
37.00 
250 . 06 
225 . 00 
400 . 00 
200 . 00 
100 . 00 


His  records  on  United  Steel  Stock  were  incomplete,  but  he 
vouched  for  the  following  transactions:   Purchased  United  Steel 
Stock  as  follows:   1914  -  80  shares  @   $100  per  share;  1915  - 
200  shares  @  $90  each;  and  1918  -  140  shares  @  $180  per  share; 
sold  in  1919  -  60  shares  @  $130  each  and  in  1921  -  120  more  shares 
for  $125  per  share.  Which  particular  purchases  he  sold,  he  could 
not  ascertain.  He  received  Standard  Oil  Stock  as  a  gift  in  January, 
1921,  from  a  relative.  The  stock  cost  the  donor  $8,000,  had  a 
market  value  of  $9,000  when  received  and  the  donee  sold  it  for 
$8,000  in  1921.  He  also  owned  $60,000  worth  of  United  Drug  Bonds 
which  he  sold  on  December  20  for  $54,000;  the  price  of  these  re- 
mained unchanged  and  he  bought  $27,000  worth  on  January  10,  1922  - 
face  value  $30,000. 

He  paid  out  the  following:  $18.43  income  tax  to  France,  $272 
income  tax  to  the  State  of  New  York,  and  $1,120  Federal  Income 
Tax.  He  gave  out  the  following  donations:   Colgate  College,  $1,000; 
Post  48  American  Legion,  $200;  Various  churches,  $500;  Land  to  the 
City  of  New  York  for  a  public  playground,  $2,000;  the  Carnegie 
Foundation,  $300.  He  also  paid  $37.00  in  sundry  consumers'  taxes, 
etc.  He  purchased  an  $8,000  automobile  during  the  year,  the  li- 
cense costing  $20.   It  was  purchased  on  installments  and  the  in- 
terest on  deferred  payments  was  $40.  He  exchanged  the  auto  later 
in  the  year  at  a  loss  of  $3,300. 

He  is  living  at  home,  supporting  a  wife,  a  child  age  10,  and 
a  dependent  mother  age  60.  He  operates  on  Long  Island  chiefly  for 
pleasure  a  small  farm,  which  cost  him  in  expenses  $1,000  for  the 
year.  At  the  race  tracks  during  the  year  the  books  show  that  he 
won  $11,000  and  lost  $10,900.  He  lost  approximately  $500  in  base- 
ball bets. 

His  tax  for  the  year  1921  will  be  found  computed  on  the  next 
three  pages,  using  Form  1040;  explanations  of  the  solution  of  the 
problem  are  on  the  pages  following. 


1*40 

U.  9.  ImrmMMAL  Ririwot 

IF  RETURN  IS  FOR 

CALENDAR  YEAR  isa 

nu  IT  WITH  THE 

COLLECTOR  OF  INTERNAL 

REVENUE  FOR  YOUR 

DISTRICT  ON  OR  BEFORE 

MARCH  IS.  im 


IF  FOR  A  PERIOD  OTHER 

THAN  A  CALENDAR 

.  YEAR  THE  RETURN 

MOULD  BE  RLED  ON  OR 

BEFORE  THE  15TH  DAY 

OP  THE  THIRD  MONTH 

FOLLOWING  THE  CLOSE 

OF  SUCH  PERIOD 


-50- 
INDIVIDUAL  INCOME  TAX  RETURN 

IM  m  INCOnS  W  Mil  THAN  SM  01  SEPAlin  tnONS  OF  BDSUND  A»  WIFE  IF  COMB^ 

FOR  CALENDAR  YEAR  1921 


Or  for  period  iMgun 


.,  It20,  and  •ndcd 


.»lttl 


MUNT  NAME  AND  ADDRESS  PLAINLY  BELOW 

-XQUl8„J*-..frlght- 
_12SL.3rjoad«i|^ 


(> 


•rniml 


Ji 


JI|lf_YiQri^a..J3U- 


(O— Ky) 


DiMliRltoh«is 


FUSr  PAYMENT 


on  cm  B.e.  cin.''*''!<iL 


OCCUPATION.  PROFESSION.  OR  KIND  OF  BUSINESS 


■Ddcomi 


^tSL^'^J^""^  th»t  thk  retan^  including  the  tccompanying  achcdulea  and  aUtamanta  (if  any),  hat  baan  auuninad  by  ma.  and.  to  tba  batt  of  my  knowladn  »ad  balial,  k  a  tnM 
ipiata  return  made  in  good  iuth,  for  the  taxable  period  m  auted,  ptuwiant  to  the  Ravaoua  Act  of  1921  and  the  RecuhUioaa  iamiad  under  authority  thanoL 


••  aad  aBhacfibad  baioca  B«  thk . 


(UiMimiii 
4aral 


ht^mt,tlmm 


itkaataraartl 


wtMiMae) 


^l«t 


•aih.) 


•(ladlrMMlw 


L  Afa  ywi » tUlam  m  laafdiat 


cnut-i 


tjva 
tUnit 


XAflL 


of  the  Unitad  Sute«r . 

4.  If  not,  ia  a  aeparata  ratnm  being 

filed  by  your  huabaod  or  wife? JU-Q. 


2.  IfyoufilcdaralwafarltN.to   „         „      , 

what Collector'a oOca «aa It  — .tt    WOW   Yorlr^     W,    Y, 


( A44MM  •(  taatTidml  w 


■«*"^) 


If  ao,  state:  (a)  Name  and  addrcat 
entered  at  head  of  that  return 


5.  Wan  you  married  and  living  with  huaband 

or  wife  on  tha  last  day  of  your  taxable  period? XfiA.. 


S.  Is  this  a  joint  return 
of  husband  and  wife?  — 

(6)  ExamntiaB 


SO- 


daimad. 


7.  Eow  many  dependent  petaons  (other  than  husband  or  wife)  under  18  yeara  of  age  or  incapable  of  arif-aupport  bacaaaa 
mentally  or  physically  defective  wero  receiving  their  chief  support  from  you  on  tba  ^t  day  of  your  taxable  period? 


U 


14 


SI 


u 

A 

M 

B 

17 

C 

M 

D 

11 


F 
G 
G 
G 


€.  It  not.  war*  you  on  the  last  day  of  your  taxable  period  suppurtiag  ana  or  more  persona 
living  in  3rour  household  who  arc  closely  related  to  you  by  blood,  marrii^,  or  adoption?  . 

» 

^ "  —  , 

INCOME. 


L  Watiaa,  Wagaii  Commimiona.  ate. 
(■tats  asis  sad  mJAnm  tt 


.Sait^.Xtfflca,-.125_Broadwa3^.-irflaLjtork... 
Iflfti^n.  ConatrnQtlon   Go.,    Haw  Yorlr 


i.  Intarast  on  Bank  Depoaita,  Notaa.  Mortgigea.  and  Oorporatioa  Bonds 

3.  Income  from  ^rtnanhips,  Fidudariaa,  ate.    (State  nam*  and  address  of  partaasaUpa.  ate.) 

•  Joalyn..QajiB-tr-ttotioa-C»yy-  Sew  Yoyk,  -l^-^Cw 

4.  Rantaand  Roynltiea ,  


S  Profit  (or  kaa)  from  Bofrfneaa  or  Prof ( 
6.  Profit  (or  loas)  from  Sale  of  Real  Ealata. 


(naC  incindiBg  IfBomi  from  partpawhipa) 


7.  Profit  (or  km)  from  Sola  of  Stocks,  Bonds,  ate. 
S.  Dividaoda  on  Stodc  ot  Domeatic  Corporationa... 


t.  Tlaxabla  Intareat  on  Liberty  Bonda,  ate . 


3D.  Otbar  Inoona  (iaduding  dividends  received  oo  atodc  of  lotaigB  eocpontkma).    (State  natnra  of  ineooM.) 

(a)  Intareat  ■Oii..3onda..aonta1n1ng  R>S  tnxm±rAA..aox£Lnajat^ 

t»)J&iYMfiMft_jcaL--ato.o]L.Al_iQrAl«n.Jlttr.px^^ 

(«)jQ§fflLbliQg_Salafl 


. — fiooa 
.zoQa 


.287. 


-12079- 


00- 


..2500. 

-loaa 


JBIL 


.301. 


AQ.9... 


.1.0.0.. 


oa. 

0£_. 
00- 

.7a_ 

00- 


OOl 


oo_ 

50 


00- 


00- 


IL  toux  Ihooiis  m  Itvh  1  to  10  (lam  loaaaa  ahown  tharoin,  if  any). 

DEDUCTIONS. 

IS.  lataNit  ^aid  (not  indndiac  intareat  daductad  abora) 

IS.  Taxaa  Bud  (not  indoding  taxes  dedoeted  above)  _..____.__.._ 

14.  liomss  by  Ria^  Stem,  ate 

15.  Ooatribntiona.  - 


Ifi.  Bid  Dabta  (not  iaduding  bad  dcbu  dedoctad  ahora) . 
IT.  Othar  DadnctioBB  Aathoiisad  by  Lav 


.4a 


^5A. 


QQl. 
OOl 


.4000. 


POj 
0. 


...0. 


u. 


Total  of  Itkim  13  to  17 


War  IwcoMi  (Item  11  minaa  Item  M) 


.40144. 


-42£4 


It afiOfiD-i.5a 


-SSL 


QSL 


COMPUTATION  OF  TAX. 


».  Rat 


21. 
21 


(Itaai  If  abora). 


Dividends  (tUn  8  abova)._. 
Tkzable  Intereatoa  Liberty 

Bonda,  etc.  (Item  9  above). 
Personal  Exemption  and 

Credit  lor  Dependents 


I-„J3j&5.. 
2800 


.00. 


50j 

00 


M. 


Total,  or  iTiMa  21,  23  and  23 . 


25.  Balaaee  (Item  20  minns  Item  94). 


26.  Amount  taxable  at  *%  (aot  over  94,000) 

-i7.  Dalanee  taxable  at  8^  (Item  25  minus  Item  26). 


flfiOSO 


.5SL7.6L 


.3207.3. 
.....4000. 


A zmi^ 


Cheduand  drafts  will  ba  accepted  only  if  payabU  at  par. 


3a 


5a_ 


28.  Normal  tax  (*%  of  Itam  2f) 

29.  Noraal  tax  (8^  of  Itam  27) 


Ba_ 

00- 


99.  Swtax  on  Itam  20  (saa  Instructioa  6) 
91.  ToTAi.  Tax ..._-_—._ 


32. 
33. 


Tax  paid  at  aoureo 

Income  and  (rofita  taxaa 
paid  to  foreign  countriea 
orposseasiomsof  tha  U.  8. 
(attach  Form  1116) 


..ia.43. 


34.  Balance  due  (Item  31  minus  Items  32  and  33) 

35.  AiBOOBt  of  tax  paid  when  filing  return 


^60. 


.2245. 


2718. 


312A. 


JE14 


.31QQ. 


-oa 


_9a 


.45. 


45. 


..oa 


-51- 

tagPOH  A^-BXrOUUTIOIt  or  mU  4.   ,yUnU  aBd  RoylU— .)     ge»lMtn»rtleall 


Xand  «  T.ftftBfld. 


t.Oon.tm1itmm 

l.lMiV4L0B. 


■Eropftrty-jplaoftd  on  Land^Prea^gottl 


J^iaoJJfejjd^yaltta  AmnrtlMdml  yniir 


JiAtal. 


RacnrsD. 


..QUQ2..7.a 


^02  .£14. 


4.  BlTAIH. 


iX.r 


il 


&  DtrascuiHui 

AID  DmCIMM. 


a_i uc 


•.OVBB 


SiO. 


.7.Q..0.Q. 


7.  NnVKMtr 


sza 


fi7QQ 


J1Q2. 


-J^352. 


XKX 


J2:4- 


J14. 


-7.8.. 


fiuie  wtimatod  life  of  propwtY  md  how  yoa  <gured  d«pt»d«tk>iiL 


SCHEDilLE  Bw-EXPtANATION  OF  ITEM  f..  (WiwInoM  or 


LS^ 


lB(tnieUoal«w 


1.  ToUl  inooiiM  (roga  hiwin—  or  ptofwriBB. 
CcwT  09  GooM  Soto: 


127500.. 


3.1lat«udMdMppU«. 


4.  MoiclMiidlM  bo«|^  for  ak. 

>UMr  coaU  (Ikt  peine 
bolow  or  00  Mpukto  i 


t.  Othor  coaU  (Ikt  priadnl  itema  and  amouata 
' labaat) 


t.  PIm  lavaatory  H  haginnh^  «l  jtmt. 
7.  ^»»*«- 


t.  Lap  iBvankty  it  «d  of  jraar. 

t.  NaT  Gear  ov  Good*  8oldl._ 


Oimsa  BonxiM  DBocdnoiia: 

10.  Salaciaa  tad  wira  not  reported  aa  "Labor" 

OB  line  2  (aaalnatniction  13) 

11.  Bant  on  bunneaa  property  in  which  t&xpayer 

haa  no  aquity 

IS.  lataroatonboiinaaaindabtadnaMtootkaia^ 


t.U4in 

4000 


tS.  Taxaa  on  bnajnaaa  and  burinaaa  property 

14.  Repaiia,  wear  and  tear,  obaoleacence,  deple- 
noo,  and  property  loaea  (explain  beiuw) . 


16.  Bad  debta  ariiinc  from  aalea  or  aervieea,  il 

already  reported  aa  income 

17.  Other  expenaaa  (liat  principal   itema  and 


IS. 


below  or  on  aepaiato  ahoct). 
TOrai.  (Itank  10  to  17,  induaive). 


JDOJ 

00 


.2QQ. 


9.8S 


1.-20832 


_JQ 


00. 


.0.4-.- 


-Q4- 


oo. 


\$2QQ2i2JjA^ 


It.  Nte  Coar,  rtoa  Total  DioocnoNa  (Item  f  plua  Item  18) 

ao.  Nt  PaoFTT  (on  Loee)  fwom  BuaiMBee  oa  Paoraaaioif  (Item  1  minua  Item  19).. 


k-M&l 


ExplaaatJonoldadactJonaltflflB    17i    Qthar    ETTflnBflfl;    StatlOTlflry  jc   Drafting     -Suppl-ifta    :pi>.nn,nn.    l-tgh-t:    ftn«^ 

Telephone  $125eQ4;  TrnYflllng  KTpQnflefl..^a7.jaa Itflm„L4m.J>etzrfixilJa±loiL.JQ-;^  ot  .<^gQQCLOjQ_ 


SCHEDULE  C— EXPLANATION  OF  ITEM  •.    (Sale  of  lUal  Ertato.)    Bmhatnctica  n. 


Land. 


ISitSl. 


xntm 


1909 


I  14Q00 


I.  AMooar 


joa 


oiaoa  QQ_i_io5oa 


4.0oat. 


JLi5jaQ_Qia 


ft.  Kabci  t,  1»U, 

VAtPt. 


JiO- 


JiJJiQfl.Qft 


6.  SOMCQVSMT 

iMraovKMuna. 


^JX 


7.  DtrsacuTiox. 


t    ZbQO.aQ^ 


a  Nrr  PBoriT 

(OK  hOSf). 


2500  00 


Ifnotaeqn 

■■■■■»-■■■   ■  ..  .J  1 .. 

»..■.. . . 

................... 

, 

SCHEDULE  D.-EXPL4NATION  OF  ITEM  7.    (Sale  of  Stocka.  Bond*,  etc.)    Bm  Instnictioa  is. 

UKm.<»Tmmmf. 

Jt^Ata 

lOoai. 

4.  Uabch  1,  UU, 
Vautk. 

•.  AMOUNT 

Racitvco. 

a.  HRPkorrr 
(obLom). 

St  Oft  V 

-    TTnltftA    ^-fcAAl 

191 4-1 S 

l-llOOil 

00 

t 

- 

e  15000 

OO 

s~40oa- 

iX)_ 

"Uty-n^t^ 

.-    TTnl-fcA^    •nr^aflp 

1920 

-JjaOQQ 

-no.. 

•• 

.  SlQflQ 

00 

-  9QQ0.. 

00 

Total 

41000 

jQa. 

,  II  ^,  , 

..JiZOQO 

00 

..,,1000 

00 

If  not  acquired  by  purd>ai»,  atate  how  acqnited- 


SCHEDULE  E.— EXPLANATION  OF  ITEM  f .    (Taaable  Intereat  on  Uberty  Bonde.  etc.)    Ba.  lnstmcttai  i». 


L  OBUOAiwmofTinrmmBrATnlMutBSaKcSimmcal,  1*17. 
(WkoOy  tttapt  iromiMcnel  tax,  but  MO^Kt  t«  airtax  M  to  wHMi  ovw  •MmfKiflos  lyMMM.) 


(a)  lint  Liberty  Loan  Second  Converted  Hfk  Booda . 


.MOHB.. 


(»)  Fkat,  and  Second  4*4,  and  Fiiat,  Second.  Third,  and  Foiiith4i'8 

(e)  OthtrOblifftionaiawad  Mace  September  l.M17(«wp«Vi»tey  and  TiiMaiylfaiw). 

(d)  Victory  liberty  Loan  4|K  Nolaa^  and  T^eaaqry  Kotw 

(«)         ToTAi.  Taxabm  IwT«B««t  (If  you  have  boo^t  or  aold  during  the  year  attach  atatement  ahowing  holdingi  by  poriods). 


Kxtamom. 
(Aap«sM«  Prindpal  Amooat.) 


.NONB_. 
.NOMI 


s.im,oaa. 


15000.00 


.JfONB. 


S.  PBIMOrAI.  Amouht 

m  ExcEM  or  Ex- 
mmom  SracmiD  m 
Coivinna,t,AMD4. 


•.  IirrucaroN  Vuk- 

OTAL  Amount  IN  Excua 

or  ExEMnioMa. 


.JLIQM^aU 


.JBll 


L 


JSjl 


..30. 


30. 


SCHEDULE  F.— EXPLANATION  OF  ITEM  14.    (Loaaee  by  Fire,  Storm,  etc.)   8m  lostmcUoo  n 


LKl 

»etF««»r. 

lOoar.oaMAaca 
l,»li,VAi.oi. 

t.  DKncaxTioN 
PasnooatT  Takim. 

4.  Saltaob  Valub. 

K.  InvBAjtca. 

•.NatLo 

Hone 

p 

1 ... 

t. 



5. 

t-JSQX^ 





SCHEDULE  C— EXPLANATION  OF  DEDUCTIONS  CLAIMED  IN  ITEMS  1,  18.  IC,  AND  17. 


J&age._Iii»  Item  .13».-Taxeg^.  H.  Ye  Stat  e  Inoome  -.2ax-^27.2^.QQ^  Land  -T.ax-gxftnoe-$^5.>.QQ 


JLaLtomoMle..I«ljaenaa..(.Tax).-42a»QQ^...3ttndr.y-^oa8ttner-8..Ja3caa.-43-7.-Oa..«...TAtal...$3^ 


JagA. J.^  Itfim»15-Coatr.llmtlona ;   cl.tyi..o:f ..|taw..:yor]t.-;;^i3tQ»O0.;-.Calgate.-Col-leg».4lQQQ*QQ • 

■  Chttrohea  $500 > 00;  Carnegie  goundatlon  ^QO.QQf..iU)<t-.4a-Jlmar1can-Xeglon.-^2QO;OQ{.-iEotal.-^AOQQ^OO~ 


(An  anaended  return  muat  be  plainly  marked  "Amended"  acroea  the  face  of  the  return.) 


-52- 


IP  RETURN  IS  FOR 

CALENDAR  YEAR  1920 

FILE  IT  WITH  THE 

COLLECTOR  OF 

INTERNAL  REVENUE 

FOR  YOUR  DISTRICT 

ON  OR  BEFORE 

MARCH  15.  1921 

IF  FOR  A  PERIOD 

OTHER  THAN  A 

CALENDAR  YEAR,  THE 

RETURN  SHOULD  BE 

FILED  ON  OR  BEFORE 

THE  ISTH  DAY  OF 

THE  THIRD  MONTH 

FOLLOWING  THE 

CLOSE  OF  SUCH 

PERIOD 


HO  Ta  B  tSSaUMl  ON  IBB  tETOIN.   SHAUS  Of  WT  nCFIT  01  LOB  SMOD  JC  lETOITED  ON  INMmOia  lETUINS 

Page  1  of  Return 

Form  10«5— UNITED  STATES  INTERNAL  REVENUE  SEJIVICE 

PARTNERSHIP  AND  PERSONAL  SERVICE  CORPORATION  RETURN  OF  INCOHE 

FOR  CALENDAR  YEAR  1920 
Or  f6r  period  begun Jatt.-X.-.  192X*  and  ended.JDec-.^l^ ,  19-21 


If  ik  mm  U 

•*(t  *Haai- 
mtm  ?Mr.  *t 

■■•f  A*  pad 


#m    fr«- 


PMirr  PIAINLY  PAXTNBRSHIPV  OR  COttrOSATIOirS  HAlia  AI«D  BUSINESS  ADDRESS 

Joslyn  Construction  Co., 
Now  York,  N.  Y, 


READ  IN- 
SIKUCTIONS 
CAREFULLY 
AND  ANSWER 
ALL  QUES- 
TIONS ON 
THIS  FORM 
BEFORE 
FILLING 
IN  THE 
SCHEDULES. 


(Do  N«t  Write  p  ttiia  S^c*) 


FwnitHBrt  br 


(Date  i«B«|yd) 


KIND  OF  BUSINESS    .Contraat era. STATE  WHETHER  PARTNERSHIP  OR  CORPORATION  ■■.Pa3?taej?&hijx. 


SCHEDULE  A-INCOME  TO  BE'ACCOUNTED  FOR  BY  MEMBERS. 


CROSS  INCOME 

I  retorni  tod  allowancai.  Contraot    WBCB- 


I.  GroMMlor,  1( 

S.  Imm  coat  of  goods  sold,  exciunva  of  •zpenm,  repain,  and  oUi«r  itema  cftlltd  for  Mpumtoly 
bdow  (from  Schedule  A2) _______ 


ado 


STXX 


000. 


00- 


-00- 


4.  Interest  on  obligations  of  the  Unit 


8.  Gross  income  from  eervicee  or  from  oncntione  other  than  trading  or  mannfartaring,  !«■  aUowancea  (from  Schedole  AS) 

lintions  of  the  Unitea  SUtes  issued  since  September  1, 1917  (wLcmpt  VicUvy  Liberty  Loan  Sf  %  Notes),  and 
War  Finance  Corporation  Bonds  (from  Schedule  B,  see  Schedule  A4) 

6.  TazaUe  intereat  from  all  othar  aoarcaa  (not  including  intaraat  refacred  to  nndar  Itam  2,  Sdiadula  D)  (from  Schedule  A5)_ 

e.  Rentala -. . _-__——____—. 


7.  Royaltiea : — -— : — : ^ ■■^■■. ■..■■■■ .__ 

8.  Share  of  net  income  earned  by  a  partnership  ar  personal  service  corporation  dnnng  ita  accounting  period  (whether  receavad 

8.  Pividenda  from  earnings  of  corporationa  taxable  by  the  United  States  on  their  net  incomes  (including  (lividenda  on  atock  < 
personal  service  corporationa  declared  out  of  profila  aamad  prior  to  Janu&ry  1, 1918)  (from  Schedule  A9) 


10.  Dividends  on  stock  of  foreign  corporations  not  taxable  by  the  United  States  on  their  net  incomaa  (from  Schedule  AlO) 

11.  Groai  income  from  all  other  aourcea  (not  including  any  amount  reported  in  Itam  23  balow)  (from  Sdwdule  All) 

IS.  Total  of  Itsiu  1  to  11         .,  .  ,  ,,  .,  >    ,    ■■ 

DEDUCTIONS 

13.  Ordinary  and  neceeaary  axpenaea  (except  amounta  reported  in  Item  2  above  or  caOad  for  aaparately  balov)  (from  Schedule 


75-670- 


00 
-0 
J2971|.-0a 
353.!.00 
Q 
0 

._.o 
i2a|.oo 

0 


A13). 


14.  Gompensstion  of  members  (including  shareholden  cf  personal  service  corporation  irti( 
commitaions,  and  other  compensation  in  whatever  form  paid)  (from  Scnedule  A14), 


m  irtio  drew  salaries  therefrom  and  aalariea, 


15.  Repairs  (including  labor,  supplies,  etc.)  (from  Schedule  A15). 
le.  Interest  (from  Schedule  A16)„ 


1?!  Taxee  'except  Federal  income  and  profits  taxes,  and  taxes  which  are  a  credit  under  Section  222  <tf  Section  238,  and  taxea 
assessed  against  local  benefits  of  a  kind  tending  to  increase  the  value  of  the  property  assesaed) 


18.  Debta  ascertained  to  be  worthless  and  charged  off  during  accounting  p«iod  (from  Schedule  A18). 

19.  Exhaustion,  wear  and  tear  (including  obaoleaccnca)  (from  Schedule  A19) 

20.  Depletion  (from  Schedule  A20) 

2L  Total  ot  Imia  13  to  20 

22,  DimiiENC*  B«Tw»EH  Imu  12  akb  21 


.i2Q-- 


483. 


a_ooa_oa 


aoa. 


00- 


aoQ 

500- 


ao- 

-jQ- 

oa 


QO0L_ba.. 

U- 


23.  Profit  or  loss  on  sales  of  capital  assets  and  miscellaneous  investments,  including  liquidating  dividends  {ttoiu  Schedul*  A23). 

24.  LosMa  sustsined  during  arcounting  period  and  not  companaated  for  by  insurance  or  othenrisa  (from  Schedule  A34) 


25.  Amortization  of  ^ar  Facilities  (from  Schedule  A2S).    (Extend  to  last  column  resulting  net  toUl  of  Itema  21,  24,  and  25) — 

26.  Nbt  Incomk  por  Accocntino  Period  to  as  AccotnrrcD  ron  bt  Mkmbbbs  (Total  op  or  DirrxBBNCB  RrrwnEN  Item 

22  akd  Item  2.'i) - 


ft. 


Z6.A4a.0O 


_..39. 


.36 


.3.6 


4S3 


«37 


9.5.7 


QQz 


OO- 


Da 


SCHEDULE  B-INTEREST  ON  LIBERTY  BONDS.  ETC. 

OmiOATioxs -. 

LouiOoavMtsd 
«%  Bomber 

(•fOOTid  I.ltWtT 

Loan  4%  BoiuU 
ell«r7-<3. 

— Ttr?lUkwly 
LMnOoDTWtsd 

B««MlUlNrty 
UsaCtavsftsd 

ThltdUb«tT 

nmUbcrtr 

L(Md8M«Bd 

OonrcrUd  4J7. 

PbofthUbwtT 
Laut4|%B«ads 

.^,o»W 

obUcatioDStMnM 
•iiiMflspMmbtr 

1,  imr. 

vnetory  Liberty 
La«i4>%Not«i 

oiim-a. 

Wer  Fiiunre 

Corpontioo  .■)% 

Bonds  ol  ItlO. 

DfCMDbsrlS. 

Maris. 
NoTtmbOTlS. 

JoMtL 
DsrcabwlS. 

Utrli. 
SvnmtmiS. 

U«rrhl&. 
Bapttmbsr  It. 

JonalS. 
DfccBbcrlt. 

AorlK. 
OeUbmlS. 

June  IS. 

April  1. 
Ocioberl. 

Amount  of  interest— 

i__     ._a.. 

1 a 

8 a-. 

8 .0. 

8 X^. 

8 0- 

[.....         0„. 

8    .     ...a 

8..297.»0a~ 

8                 0 

Total  iNTEREar  ow  All  OBUOATiONa  ab  Showw  Above  (to  be  entered  as  Item  4,  Schedule  A,  and  distributed  in  column  5,  Schedule  C). 

Bute  the  amount  of  Victory  Liberty  Loan  Si%  and  4{^  Notes  originally  subscribed  for  and  still  owned  st  the  date  of  filing  this  return... 

Bute  the  amount  of  Fourth  Liberty  Loan  4\%  Bonds  orupnally  subscribed  for  and  still  owned  at  the  date  of  filing  this  return.. 


f  „297-..Q0 


8- 
8.. 


None 


SCHEDULE  C-MEMBERS'  SHARES  OF  INCOME,  ETC. 

Enter  below  the  share  of  net  income  (whether  distributed  or  not)  of  each  member  of  the  partnership  or  shareholder  of  the  peraonal  service  corporation,  and  each  member's  share  at 
any  income  and  profits  taxes  paid  by  the  partnership  or  corporation  to  a  foreign  country  or  to  a  po«eesicA  of  the  United  Sutes.    (See  page  1  of  instructions,  paragraphs  10  to  14,  inclusive. ) 
If  the  dwtribuuble  intereats  in  the  net  incomo  are  datanBined  on  a  haaia  other  than  a  percentage  basis,  attach  an  explanatory  atatement. 


Membsrs  of  partnenhip  or  thsreholden  o(  penoasl  (errtco  corporttloa. 


I.  NsoM  and  sddreee  of  each,  u  itaowa  en  tadlTtdnsI  tax  rttums. 


{«) 
(c) 

(«0 


.-.J"o»Iy3V.-BrQoklyn^...H*_Xo. 


_J*...iQil.teL,„Long.-I«lftnd^-JIw-:X^ 


.-J^_Erlght  ».-l!fiB...3gbrk»...y^jy^. 


••nklp  at  OOB- 
Wr«f  iUfMkaM 


Vs- 


I— 151 — 50-  • 


-1/3. 


1.  Intetert  on  Tss- 
Free  Cofsaaat 
Boo*  hieia<ted  ia 
ItasltSeksaalsA. 


-5o- 


..ioi.....iQa 


SO- 


(fi 

(») , 

(t)       ToTAM.._ „ _ I8..-303 Ioa.8 iaaL.0Ql8....29.7 boJi.3-625.7-l.ao  *8 r..Q. 

The  undersized,  being  severally  duly  sworn,  each  for  himself  depoees  and  says  that  this  return,  including  the  accompanving  schedules  and  statement,  has  been  examined  by  hiny 
Bud  is  to  the  best  of  his  knowledge  and  belief  a  true  and  complete  return  made  in  g^  faith,  for  the  accotmting  period  aa  stated,  puzauant  to  the  Revenue  Act  of  1918  and  the  Regulationa 
ianied  under  authority  thereof. 

Sworn  to  and  subscribed  before  me  tUa day  of         ,  ,       ,  j  1921 


CIMvldmls. 


.60(3Cl_8 14a... 


SjOOo- 


.4QjlQ_. 


•4  Ik*  U.  S.  lM(w4  ttmm 
Smt.  I.  IS17.  »a4  War 
rimta—      CacvotmUw 

~    >4*.    atmm *.-■    ■ 
A.) 


.so8._iaii«- 


^0 


OOl- 


6.  obisr 


6039. 


-l2jQ7S._ba 


5a 


60- 


7.  Ineoms  snd  profits 
tazat  paid  to  •  lordcs 
ooantrrortos 
■Ian  olib»V. 


-I-- 
-1—0 


(MfMturs  •(  emcsr  sdalautariac  oatt) 


Prtndent  ofeorpontion. 
Membtr  of  partnenhip. 


(0»«is)sspasHy) 


Trmnmrqfcorfongm, 


As  in  Form  1040  A,  the  taxpayer's  income  from  salaries  is  re- 
ported m  Item  1,  page  1,  income  from  partnership  in  item  3.  and 
income  from  his  ovm  business  in  item  5.  As  explained,  both  the 
proprietorship  and  partnership  businesses  have  deducted  the  tax- 
payer s  salary  before  reporting  the  net  income.  Consequently,  in 
this  case  it  will  be  necessary  for  the  taxpayer  to  report  the 
*=  «^i®^  ^^°"'  these  two  sources  in  item  1.  Therefore,  both  the 
»5,000  income  and  the  $3,000  income  are  reported  at  this  stage. 
His  salary  as  Engineer  for  the  City  of  New  York  is  not  taxed. 

In  item  3,  the  taxpayer's  proportion  of  the  ordinary  partner- 
ship income  IS  reported.  From  the  profit  and  loss  statement  in  the 
problem,  it  appears  that  the  partnership  earned  $36,957.  However 
J^is  income  included  $303  interest  on  tax-free  covenant  bonds 
$120  in  cash  dividends,  and  $297  in  Victory  Note  interest.  It  is 
necessary  for  the  partnership  to  submit  a  report  of  information, 
after  which  the  taxpayer  reports  his  distributive  share  of  the 
various  kinds  of  income  received  by  the  partnership.  This  report 
of  information  is  shown  as  part  of  the  Lecture.  First  of  all  part- 
2II^S^S  records  his  profit  and  loss  statement,  showing  income 'of 
»36,957.   At  the  bottom  of  the  page  of  the  partnership  Return,  this 
income  is  then  broken  up  into  its  various  parts,  and  each  partner 
assigned  his  distributive  share,  regardless  of  the  profits  he  mav 
have  drawn  out  during  the  year. 

*u-  J^^   taxpayer's  share  of  the  profits  in  the  problem  is  one- 
third;  assume  that  two  other  taxpayers  are  to  receive  one-half  and 
one-sixth  of  the  profits.  The  report  would  show  that  one-third  of 
the  interest  on  tax-free  covenant  bonds  has  been  assigned  to  the 
taxpayer,  Mr.  Wright,  and  that  one-half  and  one-sixth  of  this  in- 
terest has  been  assigned  to  the  other  partners.  Also,  one-third  of 
the  dividends  received  and  all  the  interest  on  Liberty  Bonds  would 
also  be  assigned  to  the  taxpayer,  while  the  other  partners  would 
receive  their  distributive  shares.  The  balance  of  the  income  would 
then  be  divided  among  the  partners  according  to  their  fractional 
interest  in  the  partnership.  Thus  the  total  income  of  $36,957  would 
be  broken  up  into  $303  interest  on  tax-free  covenant  bonds,  $120 
dividends  on  stock,  $297  interest  on  Liberty  Bonds,  and  $36  237  or- 
dinary income,  with  each  partner  receiving  his  distributive  share 
of  each  kind  of  income.  This  may  be  best  understood  by  a  careful 
study  of  Schedules  A  and  C  of  the  photographic  partnership  Return. 

The  partnership  having  made  out  the  above  Return,  the  taxpaver 
then  reports  his  one-third  of  the  income  in  item  3,  page  1   He 
reports  his  one-third  of  the  dividends  in  item  8,  with  other  divi- 
dends received  directly  by  himself,  and  reports  his  share  of  the 
Liberty  Bond  interest  in  item  9,  page  1,  with  any  taxable  Liberty 
Bond  interest  received  on  bonds  owned  by  himself.  Finally,  he  re- 
ports his  share  on  tax-free  covenant  bonds  in  item  10,  line  A  of 
page  1,  with  any  other  such  interest  received. 

Regarding  the  proprietorship  business,  the  taxpayer  reports 
the  income  from  this  in  item  5,  page  1.  This  item  is  supported  in 
detail  by  Schedule  B,  page  2.  This  Schedule  is  self-explanatory. 


and  is  practically  a  transcript  of  the  profit  and  loss  account  of 
the  taxpayer.  The  foregoing  completes  the  writing  of  items  1,  3, 
and  5,  income  from  salary,  partnership  and  proprietorship. 

Item  2  of  the  taxpayer's  report  shows  income  from  interest. 
In  the  problem,  interest  has  been  received  from  various  sources; 
however,  certain  amounts  are  not  taxable.  Among  these  will  be 
interest  on  3i%  Liberty  Bonds,  4^%  Liberty  Bonds,  3f%  Victory 
Notes,  City  of  Boston  Bonds,  and  Federal  Farm  Loan  Bonds.   Interest 
received  on  bank  deposits  and  interest  received  on  bonds  should  be 
reported  in  item  2,  the  total  being  $287.06  ($250.06  plus  $37). 
The  taxpayer  also  received  $200  interest  on  tax-free  covenant  bonds. 
This  amount  is  entered  in  item  10,  line  A,  together  with  the  $101 
interest  on  tax-free  covenant  bonds  received  from  the  partnership, 
the  total  being  $301. 

Item  4  reports  income  from  rents  and  royalties.   In  this  case, 
the  taxpayer  leased  a  piece  of  land  and  received  therefrom  $1,000 
rent.  His  taxes  on  the  property  amounted  to  $170.  Both  these 
sunounts  are  reported  in  Schedule  E. 

Schedule  E  should  also  include  amy  income  accruing  to  the 
lessor  of  property  through  the  permanent  attachment  to  his  land 
of  buildings,  etc.   In  this  case,  the  lessee  of  the  taxpayer's 
land  has  erected  thereon  a  building  worth  $15,000.   The  new  rule 
for  the  handling  of  this  item  is,  that  the  taxpayer  reports  as 
income  in  the  year  in  which  such  permanent  improvement  was  placed 
upon  his  land,  the  value  of  the  new  property  as  encumbered  by  the 
lease,  or  the  difference  between  the  value  of  the  land  without  the 
building,  and  the  value  of  the  land  with  the  building,  the  build- 
ing being  subject  to  a  lease.   Ordinarily,  this  means  that  the 
lessor  reports  the  value  of  the  property  in  1921  at  its  depreciated 
value  in  1931  when  he  obtains  possession  as  well  as  ownership  of 
the  property.   In  the  particular  instance  under  consideration,  the 
building  cost  $15,000  and  will  depreciate  at  the  rate  of  2%,  or 
$300  a  year,  for  the  next  ten  years,  and  will  be  worth  $15,000 
less  $3,000,  or  $12,000,  in  1931.   The  taxpayer  therefore  reports 
in  1921  the  value  of  the  building  in  its  depreciated  condition 
when  returned  to  him  with  his  land  at  the  expiration  of  the  lease. 
However,  by  special  decision,  the  Government  has  permitted  the 
taxpayer  to  report  the  discounted  value  in  1921  of  $12,000  to  be 
received  in  1931,  or  permits  him  to  report  the  present  worth  of 
$12,000  to  be  received  10  years  hence.  The  Government  has  not  set 
any  special  rate  to  be  used  in  computing  discounted  value,  but, 
assuming  6%   as  the  normal  rate,  $12,000  received  at  the  termina- 
tion of  the  lease  10  years  hence,  discounted  annually  at  6%,  has 
a  present  worth  of  $6,700.74.  This  amount  is  therefore  reported 
as  income  from  the  property  erected  on  the  taxpayer's  land.  No 
depreciation  is  allowed  against  the  $6,700.74,  and  presumably, 
(although  the  law  is  silent  on  this  point)  the  discount  value 
should  be  amortized  each  year  from  1921  to  1931,  bringing  the 
$6,700.74  finally  up  to  the  taxable  value  of  the  property  - 
$12,000.   Depending  upon  the  facts  and  the  exact  dates  in  a 
particular  case,  part  of  such  amortized  discount  might  be  re- 


reported  income  in  the  present  year.  One  year's  ajnortized  dis- 
count has  been  taken  in  the  problem  on  the  assumption  that  the 
building  was  immediately  placed  upon  the  land.  Six  percent  of 
$6,700.74  equals  $402.04,  and  this  amount  has  been  added  to  the 
present  worth  of  $12,000  and  reported  as  income.  See  Schedule  A, 
page  2,  of  the  Return. 

The  foregoing  completes  the  writing  of  items  1  to  5  and  the 
filling  in  of  the  supporting  Schedules  A  and  B,  on  page  2  of  the 
Return. 

Item  6,  page  1,  reports  profit  or  loss  from  the  sale  of 
Real  Estate.   In  this  case,  the  land  sold  in  1921  but  purchased  in 
1909  is  reported.   In  this  case,  the  land  cost  $11,500,  was  worth 
$10,500  on  March  1,  1913,  and  sold  for  $14,000  in  1921.   The  1909 
value  is  used  for  cost,  because,  in  computing  profit  on  items  pur- 
chased before  March  1,  1913,  the  taxable  gain  shall  not  exceed  the 
actual  gain,  and  only  that  part  of  the  actual  gain  assignable  to  the 
period  after  March  1,  1913.   The  actual  gain  is  $2,500,  the  gain 
since  March  1,  1913,  is  $3,500,  the  former  being  used.  The  sales 
price  of  $14,000  and  the  1909  cost  price  of  $11,500  are  reported 
in  Schedule  C. 

Item  7  reports  profit  or  loss  from  the  sale  of  stocks,  bonds, 
etc.   In  the  case  of  stocks,  where  the  information  relative  to  a 
certain  kind  is  uncertain,  any  sale  of  stock  is  charged  against  the 
earliest  purchases  first.   In  this  particular  case,  it  appears  that 
the  taxpayer  purchased  80  shares  of  United  Steel  Stock  in  1914,  200 
more  in  1915,  and  140  more  in  1918.  He  sold  60  shares  in  1919.   It 
therefore  appears,  that  of  the  total  purchased  (80  plus  200  plus 
140,  or  420  shares)  he  has  sold  60  already,  these  properly  having 
been  charged  against  the  first  80  purchased,  and  he  now  disposes 
of  120  more  shares.  These  should  be  charged  against  the  remaining 
20  of  the  first  100  purchased  in  1914  and  not  yet  considered  sold, 
and  the  remaining  100  shares  should  be  charged  against  the  200  pur- 
chased in  1915.   The  20  shares  purchased  in  1914  cost  $2,000  ($100 
per  share)  and  the  100  in  1915,  $9,000  ($90  per  share).   Therefore, 
the  total  cost  of  the  stocks  sold  in  1921  was  $11,000.   The  sales 
price  is  $15,000.   (120  shares  sold  for  $125  per  share.)  #The  in- 
come of  $15,000  less  the  $11,000  cost  is  reported  in  Schedule  D. 

The  taxpayer  sold  $60,000  in  bonds  for  $54,000,  suffering  a 
$6,000  loss.  However,  he  purchased  similar  bonds  within  30  days 
of  the  sale,  therefore  the  $6,000  loss  may  not  be  taken  (Act  of 
1921).  However,  if  the  amount  purchased  is  less  than  the  amount 
sold,  a  fractional  loss  is  allowed.  He  secured  $30,000  worth  of 
bonds  for  $27,000;  hence  one-half  the  loss  may  be  taken.   Therefore 
Schedule  C  shows  the  cost  and  sales  price  of  that  part  of  the 
$60,000  sold  and  not  re-purchased,  or  $30,000  sold  for  $27,000 
(Act  of  1921).   The  net  gain  in  Schedule  C  is  then  transferred  to 
Item  7,  page  1, 

Item  8  reports  dividends  on  stocks  of  domestic  corporations. 
The  taxpayer  reports  in  this  item  the  $40  in  dividends  received 


through  the  partnership.  He  also  received  cash  dividends  from  the 
European  Products  Co.  of  England,  the  Michelin  Tire  Co.  of  France, 
and  the  United  Steel  Co.,  while  he  received  a  stock  dividend  from 
Cadillac  Motor  Co.  Assume  that  the  European  Products  Co.  made  over 
50%  of  its  profits  in  this  country  during  the  years  1918  to  1920. 
The  stock  dividend  from  the  Cadillac  Motor  Co.  is  not  taxed,  and 
not  reported.   Cash  dividends  from  the  United  Steel  Co.  and  Euro- 
pean Products  Co.  are  subject  to  the  Surtax  only,  and  are  reported 
in  item  8.   Item  8  should,  therefore,  show  a  total  of  $365,  as 
follows:   $40  in  dividends  from  the  partnership,  $225  from  the 
European  Products  Co.,  and  $100  from  the  United  Steel  Co.  The  div- 
idend of  $400  received  from  the  Michelin  Tire  Co.  of  France  should 
be  reported  in  item  10,  line  B;  as  dividends  from  a  foreign  cor- 
poration, making  less  than  50%  of  its  profits  in  this  country,  are 
subject  to  both  the  Normal  Tax   guid  the  Surtax. 

Item  9  reports  taxable  Liberty  Bond  interest.  First,  Liberty 
Bonds  owned  are  reported  in  Schedule  B,  page  2.  This  Schedule 
will  show  that  the  interest  received  on  the  $15,000  4^%  bonds  is 
exempt,  while  the  $712.50  received  on  4f%  Victory  Notes  plus  the 
$99  received  through  the  partnership  of  4-|%  Victory  Notes  will  be 
tgixed.  Therefore,  $811.50  will  give  the  taxable  Liberty  Bond  in- 
terest. As  a  matter  of  information,  the  taxpayer  may  show  the 
amount  of  Liberty  Bonds  held,  averaged  for  the  year,  by  dividing 
.0475  into  $811.50,  giving  $17,084.21.   The  taxable  Liberty  Bond 
interest  of  $811.50  is  transferred  to  item  9,  page  1. 

Item  10  reports  miscellaneous  income.  Already,  there  have  been 
placed  in  this  item  the  interest  from  tax-free  covenant  bonds  and 
the  dividends  received  from  stock  of  foreign  corporations.  There 
needs  to  be  added  at  this  time  only  the  income  from  gambling. 

Regarding  gains  and  losses  through  gambling,  betting,  and 
similar  transactions,  the  general  rule  is,  that  illegal  losses 
are  not  deductible  and  illegal  gains  taxable.  However,  an  ex- 
ception to  the  rule  is,  that  losses  of  a  similar  nature  as  gains 
may  be  used  to  offset  such  gains,  giving  a  net  profit  for  gambling 
in  any  particular  line.  The  taxpayer,  as  the  records  of  the  race 
tracks  show,  has  made  $11,000  in  race-track  gambling,  and  lost 
$10,900.   Instead  of  reporting  $11,000  profit  and  taking  no  loss, 
he  may  use  the  $10,900  loss  to  offset  the  $11,000  gain  and  report 
only  the  $100  net  profit.   If  the  loss  had  been  $11,900  instead  of 
$10,900,  the  net  loss  of  $900  could  not  have  been  deducted.  The 
loss  through  baseball  bets  is  not  an  allowable  deduction. 

The  total  of  items  1  to  10  is  placed  in  item  11.  From  this  is 
subtracted  personal  deductions  in  lines  12  to  17.  The  taxpayer  paid 
$40  in  interest  on  deferred  installments  when  buying  his  automobile, 
and  may  deduct  the  amount  at  this  time.  He  paid  out  in  taxes  the 
following  sums:  New  York  State  income  tsix  $272,  sundry  consumers' 
taxes  $37,  land  tax  to  the  Government  of  France  $25,  and  automobile 
license  $20;  total  $354.  He  gave  out  in  deductible  donations  $2,000 
to  the  City  of  New  York,  $1,000  to  Colgate  College,  $500  to  various 
churches,  $300  to  the  American  Legion,  and  $200  to  the  Carnegie 


-57- 

Foundation.  The  donations  to  the  City  of  New  York,  the  American 
Legion,  and  Carnegie  Foundation  are  permitted  starting  with  the  year 

The  total  deductions  for  interest,  taxes,  and  contributions 
is  placed  in  item  18,  subtracted  from  item  11,  and  the  net  income 
placed  in  item  19. 

The  tax  is  then  computed  at  the  bottom  of  page  1. 

When  the  amount  of  income  is  transferred  to  item  20,  Page  1, 
before  the  Normal  Tax  is  paid,  certain  credits  are  allowed;  these 
include  the  personal  exemption,  any  cash  dividends  received,  and 
any  taxable  Liberty  Bond  Interest.  After  these  are  subtracted,  the 
first  $4,000  of  the  taxable  income  is  taxed  at  the  rate  of  4%,  and 
the  balance  of  the  taxable  income  subject  to  the  Normal  Tax  taxed 
at  the  rate  of  8%.  The  two  amounts  are  then  entered  on  lines  28 
and  29  of  Page  1.  The  Surtax  is  then  computed  on  the  amount  in 
Item  20,  or  $36,050.30.  The  Surtax  on  $36,000  is  $2,710,  according 
to  the  Surtax  Rate  Table  contained  in  the  Instruction  Sheets.  The 
amount  in  excess  of  $36,000,  or  $50.30,  is  then  taxed  at  17%,  as 
per  instructions  in  the  Surtax  Rate  Table,  giving  $8.55,  which 
amount  is  added  to  the  Surtax  on  $36,000,  giving  $2,718.55  ($2,710 
plus  $8 . 55 ) . 

The  two  Normal  Taxes  plus  the  Surtax  give  the  total  indi- 
vidual income  tax,  or  $5,124.45,  from  which  are  then  subtracted 
the  amounts  paid  at  the  source  on  tax-free  covenant  bonds,  $6.02, 
and  the  income  tax  paid  the  Government  of  France,  $18.43  -  the 
the  final  tax  therefore  being  $5,100.  Any  ordinary  tax  paid  to 
a  foreign  government  is  deductible  as  expense,  but  an  income  tax 
paid  to  a  foreign  government  is  deductible  from  the  final  tax 
payable,  reducing  the  amount  of  tax  to  be  paid  to  the  United  States, 

In  the  problem,  it  has  also  been  mentioned  that  the  taxpayer 
received  stock  worth  $9,000,  but  that  it  cost  the  donor  $8,000, 
and  that  the  donee  later  sold  it  for  $8,000.  The  former  rule  was 
that  the  fair  market  value  at  the  time  the  property  was  acquired 
was  considered  cost  for  the  purposes  of  computing  the  gain  or  loss. 
The  new  rule  is,  that  in  the  case  of  a  gift  the  cost  to  the  donor 
will  be  the  basis  for  computing  the  gain  or  loss.  As  the  stock 
cost  the  donor  $8,000  and  was  sold  for  $8,000,  there  is  neither  a 
gain  nor  loss  to  be  reported  (Act  of  1921).  Under  the  old  rule 
there  would  have  been  a  loss. 

The  Federal  Income  Tax  for  the  prior  year  is  not  deductible, 
or  the  loss  on  the  farm  run  for  personal  recreation.  The  loss  on 
the  exchange  of  the  taxpayer's  automobile  may  not  be  taken,  as 
non-business  losses  are  allowable  only  when  they  result  from  fire, 
storm,  theft,  casualty,  etc.  The  loss  on  the  sale  of  stock  ac- 
quired as  a  gift  is  not  allowed,  as  explained  above. 


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LECTURE  6. 


Questions  tc  be  Answered. 


Compute  on  Form  1040,  the  tax  of  Mr.  J.  L.  Cross,  100 
Commonwealth  Ave.,  Boston  Mass.  He  supports  a  wife  and  two 
daughters  under  18,  and  his  wife's  sister,  age  35,  in  the  same 
household.  He  submitted  a  report  last  year  on  an  Accrual  Basis. 

The  taxpayer  is  engaged  in  the  real  estate  business,  both 
as  a  real  estate  broker  and  owner  of  property.   He  reports  the 
following  transactions  from  his  brokerage  business:   Commissions 
Received  $52,450,  Expenses:  Salaries  to  Self  $8,000,  to 
Assistants  $10,000,  Office  Supplies  and  Expenses  $550,  Adver- 
tising and  Soliciting  Expenses  $2,200,  Depreciation  of  Equip- 
ment $200,  Rent  $4,800,  Losses  on  Bad  Accounts  $300. 

He  sold  two  pieces  of  land  owned  by  himself  during  the  year. 
One  piece  was  purchased  in  1908  for  $5,000,  was  worth  $5,500. 
March  1,  1913,  and  was  sold  for  $9,000  in  1921.  Another  was  pur- 
chased in  1912  for  $10,000,  was  worth  $9,600  March  1,  1913,  and 
sold  for  $12,000  in  1921. 

From  property  owned  by  himself  and  sub rented,  he  reports  the 
following:  Rents  Received*$22,000,  Expenses:  Taxes  $4,800,  Depreci- 
ation $4,500,  Repairs  $2,100,  Cost  of  Help  $3,900,  Incidentals 
$1,000,  Interest  $500,  Insurance  $600. 

On  his  own  residence,  not  sub rented,  he  reports  expenses  as 
follows:   Taxes  $450,  Interest  $200,  Insurance  $400,  Repairs 
$50. 

Income  from  corporation  bonds  amounted  to  $340,  from  Liberty 
Bonds  -  4f  Fifths  -  $475  and  cash  dividends  from  stock  $510. 


He  reports  that  he  paid  out  a  State  Income  Tax  of  $290,  a  Fed- 
eral Tax  of  $3,200,  a  Poll  Tax  of  $5,  Auto  License  $20,  donations 
to  Boston  Athletic  Association  $100,  Red  Cross  $100,  Boston  Uni- 
versity $500,  and  Y.M.C.A.  $200.  His  wife  gave  $500  to  Radcliffe 
College  and  $250  to  the  Boston  Unit  of  the  Women's  Auxiliary  of 
the  American  Legion. 


-59- 


LECTURE  7. 

Corporation  Income  Tax. 

Kinds  of  Taxes. 
Rates  of  Taxes. 
Corporations  Exempt. 
Corporation  Income  Taxable  and  Exempt. 

KINDS  OF  TAXES:  For  the  year  1921,  two  taxes  are  levied  against 
the  incomes  of  corporations  -  an  Income  Tax  and  an  Excess  Profits  Tax; 
for  the  year  1922,  there  will  be  only  an  Income  Tax.   The  Income  Tax 
for  1921  is  at  the  rate  of  10%,  and  for  1922  at  the  rate  of  12i%.  An 
exemption  of  $2,000  is  permitted  corporations  with  incomes  of  |25,000 
or  less,  while  corporations  with  incomes  between  $25,000  and  $25,200 
are  subject  to  a  special  exemption.   An  Excess  Profits  Tax  is  levied 
against  income  at  the  rate  of  20%  and  40%,  after  subtracting  8%  of  a 
corporation's  Invested  Capital  plus  an  exemption  of  $3,000  from  its 
profits.   (For  a  detailed  explanation  of  Invested  Capital  see 
Lectures  8  and  9) . 

RATES  OF  TAXES.   COMPUTATION  OF  TAXES.  For  the  year  1921,  a 
corporation  has  an  Invested  Capital  of  $200,000  and  a  profit  of 
$85,000.  Its  Income  and  Excess  Profits  Taxes  would  be  computed  as 
follows,  first  computing  the  Excess  Profits  Tax: 


Invested  Capital $200,000 

Income 85,000 


8%  of  $200,000 $16,000 

Specific  Exemption...  3,000 

Total  Credit  $19,000 


Excess  Profits  Tax 
Income   Credit 


20%  of  Invested  Capital  $40,000 
Over  20%  of  Inv.  Capital  45,000 


$19,000 
0 


Taxable 
Income 

$21,000 
45,000 


$85,000  $19,000  $66,000 
The  Excess  Profits  Tax  is  $22,200. 

Income  Tax 


Rate  Tax 

20%   $4,200 
40%   18,000 

$22,200 


Income $85,000 

Less  Excess  Profits 

Tax  Credit 22,200 


Income  Tax,  10% $6,280 

Excess  Profits  Tax 22,200 


Am't  taxed  at  10% $62,800 


Total  Tax $28,480 


EXPLANATION  OF  COMPUTATION:   It  is  necessary  to  compute  the 
Excess  Profits  Tax  first,  because  the  amount  obtained  is  used  as  a 
credit  against  the  income  subject  to  the  Income  Tajc. 

In  computing  the  Excess  Profits  Tax  it  is  necessary  first  of 


-60- 

all  to  obtain  the  Excess  Profits  Credit,  which  consists  of  8%  of 
the  Invested  Capital,  or  $16,000,  plus  the  $3,000  specific  exemption, 
or  a  total  of  $19,000.   The  reason  for  this  is  that  a  corporation  is 
allowed  to  make  8%   on  its  Invested  Capital  plus  $3,000  before  it  is 
subject  to  a  tax  due  to  making  a  profit  in  excess  of  a  normal  return 
from  its  investment.   The  corporation,  therefore,  is  permitted  to  make 
$19,000  before  being  subject  to  the  Excess  Profits  Tax. 

Next,  20%  of  the  corporation's  Invested  Capital  is  found, 
amounting  to  $40,000.  What  a  corporation  makes  above  its  Excess 
Profits  Tax  Credit  and  up  to  20%  of  its  Invested  Capital  is  taxed 
at  the  rate  of  20%.   Therefore  what  the  corporation  made  between 
$19,000  and  $40,000  is  taxed  at  20%,  giving  a  tax  of  $4,200.   All 
that  a  corporation  makes  above  a  20%  return  on  its  investment  is 
taxed  at  40%.   In  this  case  all  above  $40,000  and  up  to  $85,000, 
or  $45,000  additional  income,  is  taxed  at  40%,  giving  $18,000  more 
tax.   The  $4,200  plus  $18,000  gives  $22,200,  the  corporation's  Excess 
Profits  Tax. 

In  order  to  compute  the  Income  Tax,  the  income  of  $85,000  is 
used  again.   From  this  is  subtracted  the  Excess  Profits  Tax  of 
$22,200,  leaving  a  balance  of  $62,800,  which  is  taxed  at  10%,  giving 
$6,280.   This  is  added  to  the  $22,200,  giving  a  total  corporation 
tak  of  $28,480.   (For  additional  illustrations  of  corporation  tax 
computations,  see  Lecture  10). 

•  Corporations  Exempt. 

The  following  fourteen  groups  of  corporations  are  exempt,  each 
under  the  special  conditions  enumerated: 


1.  LABOR,  HORTICULTURAL  OR  AGRICULTURAL  ORGANIZATIONS,  if  educa- 
tive, instructive,  and  beneficent  in  character,  if  for  the  promo- 
tion and  betterment  of  industrial  and  agricultural  conditions, 
and  if  the  net  income  does  not  inure  to  the  benefit  of  any  member. 

2.  MUTUAL  SAVINGS  BANKS,  if  having  no  capital  stock  represented 
by  shares.   A  Massachusetts  savings  bank,  otherwise  exempt,  with 
an  insurance  department,  is  still  considered  a  mutual  savings  bank. 

3.  FRATERNAL  BENEFICIARY  SOCIETIES,  ORDERS  OR  ASSOCIATIONS,  if  op- 
erated under  the  "lodge  system"  and  paying  sick,  accident  or  other 
benefits  to  members  or  their  dependents. 

4.  DOMESTIC  BUILDING  AND  LOAN  ASSOCIATIONS  AND  CO-OPERATIVE  BANKS, 
if  not  run  for  a  profit  or  if  members  share  earnings  on  substan- 
tially the  same  footing.  Where  paid-up  stock  is  guaranteed  a 
fixed  dividend,  and  the  holders  also  share  in  the  remaining  pro- 
fits with  the  other  shareholders,  exemption  is  not  allowed. 

5.  CEMETERY  COMPANIES,  if  operated  exclusively  for  the  benefit  of 
members.  Where  all  lot  owners  are  members  and  hold  stock  on  which 
a  dividend  is  paid  and2;the  stock  itself  is  to  be  retired  when  the 
lots  are  sold,  exemption  is  allowed. 


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6.  CORPORATIONS  AND  COMMUNITY  CHESTS,  FUNDS  OR  FOUNDATIONS 
ORGANIZED  FOR  RELIGIOUS,  CHARITABLE,  SCIENTIFIC,  LITERARY,  OR 
EDUCATIONAL  PURPOSES,  if  (1)  organized  for  one  or  more  of  the  pur- 
poses specified,  (2)  exclusively  for  such,  and  (3)  the  net  income 
does  not  inure  to  the  benefit  of  any  individual  stockholder. 

The  group  includes  societies  assisting  needy  families,  furnish- 
ing nurses,  giving  free  instruction,  offering  lecture  services, 
etc.   It  excludes  societies  publishing  controversial  propaganda, 
or  engaged  for  part  time  in  pursuits  other  than  the  above. 

7.  BUSINESS  LEAGUES,  CHAMBERS  OF  COMMERCE,  AND  BOARDS  OF  TRADE, 
if  not  run  for  a  profit  and  if,  in  the  case  of  a  business  league, 
the  members  have  a  common  business  interest. 

8.  CIVIC  LEAGUES,  if  not  organized  for  a  profit  and  run  exclu- 
sively for  the  promotion  of  social  welfare.  Where  originally  or- 
ganized for  profit  and  now  exclusively  engaged  in  welfare  work, 
exemption  is  not  allowed. 

9.  RECREATIONAL  AND  PLEASURE  CLUBS,  if  operated  exclusively  for 
recreation,  etc.,  with  no  profits  inuring  to  the  benefit  of  in- 
dividual members.  Where  a  hunting  club  continually  sells  timber 
for  a  profit  on  land  it  owns,  exemption  is  not  allowed. 

10.  MUTUAL  CO-OPERATIVE  AND  PROTECTIVE  ASSOCIATIONS,  if  not  run 
for  profit.  Where  incidental  profit  is  received,  as  bank  inter- 
est, exemption  is  allowed.   This  group  includes  mutual  fire  in- 
surance companies,  co-operative  telephone  companies,  mutual  hail, 
cyclone,  irrigation  and  similar  societies,  etc. 

11.  CO-OPERATIVE  SALES  AGENCIES,  if  the  income,  less  necessary  ex- 
penses, is  distributed  in  proportion  to  the  value  and  quantity  of 
the  goods  supplied  by  the  members. 

12.  HOLDING  COMPANIES,  if  the  income,  less  necessary  expenses,  is 
to  be  transferred  to  corporations  in  themselves  exempt. 

13.  FEDERAL  LAND  BANKS  AND  NATIONAL  FARM-LOAN  ASSOCIATIONS  if 
created  by  the  Government  Act  of  July,  1916. 

14.  PERSONAL-SERVICE  CORPORATIONS,  if  proving  themselves  to  be 
such,  in  which  case  the  members  report  as  individuals,  for  pur- 
poses of  the  tax.  For  1922,  personal-service  corporations  report 
the  sajne  as  other  corporations. 

To  be  entitled  to  exemption,  any  of  the  above  corporations, 
except  in  group  14,  must  file  an  affidavit  with  the  collector, 
showing  (1)  the  character  of  the  organization,  (2)  purposes  for 
which  organized,  (3)  receipt  and  disposition  of  income,  (4) 
whether  income  is  carried  to  surplus  and  distributed  in  part 
to  members,  (5)  any  other  facts  necessary  to  prove  exemption, 
(6)  copy  of  articles  of  organization  or  incorporation  and  by-laws.   If 
approved  by  the  collector,  no  further  return  of  income  is  necessary. 
If  any  case  is  doubtful,  the  collector  will  obtain  decision  from  the 


-62- 

commissioner.  Once  exempt,  no  further  return  of  income  is  necessary, 
it  being  the  business  of  the  collector  to  investigate  from  time  to 
time  to  see  if  the  corporation  is  still  entitled  to  exemption. 

All  corporations,  not  specifically  exempt,  even  though  operated 
at  a  loss,  must  mai^e  a  return. 

Corporation  Income  Taxable 
and  Exempt. 
Gross  Income,  Allowable  Deductions 
and  Net  Income  for  Corporations. 

A  corporation  is  taxed  on  its  net  income,  which  is  its  gross 
income  less  allowable  deductions.  Except  in  the  case  of  insur- 
ance companies-  and  foreign  corporations,  gross  income  is  practically 
the  same. as  for  individuals.   The  following  exceptions,  covering 
gross  income,  may  be  noted: 

A  corporation  reports  proceeds  from  life  insurance  policies, 
upon  death  of  the  insured,  less  any  premiums  paid  out,  as  income  for 
1920,  but  not  for  1921.  Trustees  holding  property  for  a  corporation 
must  report  profits  from  the  sale  of  assets.  Also,  if  a  lessee  pays 
interest  or  dividends  directly  to  bondholders  or  stockholders  through 
having  leased  a  corporation's  property,  the  amount  so  paid  is  income 
to  a  corporation  although  never  handled  by  it. 

No  income  or  loss  results  from  the  buying  and  selling  of  a 
corporation's  own  stock.  Thus,  if  a  corporation  sells  its  stock 
at  a  premium  or  discount,  no  income  or  loss  resulting  is  to  be 
reported.   So  also,  if  a  corporation  receives  Treasury  Stock 
through  purchase  or  as  a  gift,  and  sells  it  at  a  profit  or  loss, 
no  taxable  gain  or  allowable  deduction  results.   If  a  corporation 
levies  a  voluntary  assessment  against  stockholders,  the  amount 
received  is  not  taxable  income.   If  a  corporation  buys  and  sells 
investments  in  other  companies,  the  gain  or  loss  is  to  be  reported 
for  tax  purposes.  The  buying  and  selling  of  a  corporation's  own 
stock  is  looked  upon  as  a  reduction  or  increase  of  the  company's 
investment  account,  and  is  called  a  capital  transaction,  as  dis- 
tinguished from  the  buying  and  selling  of  some  other  company's 
stock,  which  is  called  a  revenue  tretnsaction. 

Transactions  relating  to  bonds  of  a  corporation  are  classed  as 
revenue,  and  resulting  gains  and  losses  are  reported.   Thus,  if 
a  corporation  sells  $100,000  in  bonds  for  $110,000  the  $10,000 
is  considered  income  to  be  prorated  by  the  corporation  over 
the  life  of  the  bonds.   In  the  same  way,  if  bonds  are  sold  at  a 
discount,  the  loss  is  to  be  prorated  over  the  life  of  the  bonds. 
If  bonds  are  re-purchased  before  maturity  date,  then  the  differ- 
ence in  purchase  price  over  the  remaining  book  value  is  loss 
or  gain  for  the  year  of  the  cancellation  of  the  obligations.   Thus, 
a  concern  sold  $10,000  in  bonds  for  $11,000  under  a  ten-year  is- 
sue agreement.   At  the  end  of  the  seventh  year,  the  bonds  were 
purchased  by  the  company  for  $10,500.  A  loss  of  $200  results 
from  the  cancellation.   The  company  treated  the  $1,000  premium  as 
deferred  income,  and  for  each  of  seven  successive  years,  reported 


$100  income  in  its  returns.  The  bonds  therefore  had  a  book 
value  of  $11,000  less  $700  at  the  end  of  seven  years,  or  $10,300. 
They  were  cancelled  for  $10,500,  giving  a  loss  of  $200. 

Deductions  allowed  corporations  differ  from  those  of  indiv- 
iduals as  follows:  Only  reasonable  compensation  may  be  paid  offi- 
cers, and  only  for  services  actually  rendered.  What  constitutes 
reasonable  compensation  depends  upon  all  the  facts  in  a  particu- 
lar case.  Rent  may  be  deducted  only  if  a  corporation  has  no 
equity  in  the  leased  property.  Interest  may  be  deducted,  except 
when  paid  on  loans  to  purchase  securities  the  income  from  which 
is  exempt.  A  foreign  corporation  may  deduct  as  interest  only 
that  proportion  of  all  interest  paid,  which  its  income  from  the 
United  States  bears  to  all  its  income.  All  taxes  paid,  including 
special  corporation  taxes,  are  deductible,  except  local  benefit 
taxes  and  income  and  excess  profits  taxes  paid  to  the  Federal 
Government.  Ordinary  foreign  real  property,  privilege  and  other 
taxes  are  deductible  as  expenses,  but  income  taxes  paid  foreign 
governments  are  deductible  directly  from  the  income  and  excess 
profits  taxes  due  this  country. 

A  corporation  reports  as  income,  and  then  deducts  as  not  tax- 
able, any  dividends  received  from  other  American  corporations, 
as  defined.  Dividends  received  by  American  corporations  from 
foreign  corporations  which  have  made  over  50%  of  their  profits  here 
for  the  last  3  years  are  not  taxable.   Amortization,  depreciation, 
and  depletion  allowances  are  the  same  as  for  individuals. 

The  15%  deduction  for  donations  to  charitable,  religious, 
scientific  and  educational  organizations,  allowed  individuals, 
is  not  allowed  corporations.  A  corporation  may  deduct  only  those 
donations  from  which  it  receives  a  direct  benefit,  as,  for  ex- 
ample, where  a  corporation  donates  to  a  hospital  or  school  for 
its  own  employees.  Where  a  street  railway  company  donated  funds 
to  a  convention,  anticipating  increased  business  therefrom,  it 
was  held  that  the  gift  was  deductible.  No  deduction  may  be  made 
for  dividends  paid,  but  a  deduction  is  allowed  for  interest  paid 
on  bonds.   Interest  paid  on  scrip  dividends  is  deductible.   If  a 
corporation  retains  and  pays  to  the  Federal  Government  a  2%  tax 
on  so-called  tax-free  covenant  bonds,  the  tax  may  not  be  deducted. 
If  a  similar  tax  is  paid  a  State,  it  may  be  deducted. 

If  banks  or  other  corporations  pay  special  stockholders' 
taxes  to  a  State,  the  amounts  are  deductible  by  the  banks  or  other 
corporations  under  the  new  law.   If  a  State  Law  requires  a  bank  to  set 
aside  annually  an  amount  called  a  "Depositor's  Guarantee  Fund"  and 
this  is  actually  set  aside  and  in  the  possession  of  the  State,  no 
longer  a  bank  asset,  the  amount  may  be  deducted.   Corporations 
may  not  deduct  the  following:  Strictly  personal  expenses  incurred 
by  officers  and  individuals,  amounts  paid  for  life  insursmce 
of  officers  or  employees,  if  the  corporations  are  the  benefici- 
aries, orggmization  expenses  (considered  assets),  and  amounts 
paid  by  a  guaranteeing  corporation  for  a  subsidiary  compemy,  in 
fulfilling  its  contract  of  guaranteeing  dividend  payments  for  the 
smaller  concern.  Corporation  tetxable  income,  therefore,  is  the 
ssune  as  for  individuals,  except  as  noted. 


Computing  Taxable  Income  of  a  Corporation. 

A  corporation,  organized  Jan.  10,  1921,  submits  the  follow- 
ing Profit  and  Loss  Statement  for  the  year,  from  which  to  compute 
its  taxable  income: 


Sales 

Cost  of  Manufactured  Goods  Sold 

Gross  Profit  on  Sales 
Plus  other  gains: 
Interest  on  Liberty  Bonds  -  4th  Issue 
Interest  on  Bonds,  American  Corporation 
Dividends  on  Stock,  American  Corporation 
Dividends  on  Stock,  Foreign  Corporation 
Interests  on  City  of  New  York  Bonds 
Land  Donated  to  Corporation  by  City 
Profit  on  Sale  of  Capital  Asset  (Land) 
Rental  Income 

Pension  Fund,  withheld  from  Payroll 
Assessment  of  Stockholders 
Profit  from  Employees'  Restaurant 

Total  Income 

Less  Miscellaneous  Expenses: 
Officers '  Salaries 
Bonus  to  Officers 
Expense  against  Rent  Income 
Organization  Expenses 
Fines  and  losses  in  law  suits 
Discount  on  Stock  Sold 
Commissions  on  Stock  Sold 
Loss  on  Re-purchase  of  Own  Stock  Sold 
Bond  Discount  Written  Off 
Dividends  Paid 
Interest  on  Scrip  Dividends 
Federal  Income  Tax  for  1921  Estimated 
City  Property  Taxes 

Decrease  in  Market  Value  of  Stocks  Owned 
Bond  Interest  Paid 
Donations  to  Red  Cross 

Donations  to  Y.  M.  C.  A.  for  Benefit  of  Help 
Donations  to  School  operated  by  Corporation 
Payments  to  State  Compensation  Insurance  Fund 
2%  Paid  to  Government  on  Bond  Interest 
Interest  on  Notes  Payable 
Interest  on  Loan  to  Purchase  Liberty  Bonds 
Interest  on  Loan  to  Purchase  Amer.  Corp.  Stock 
City  Tax  to  Grade  Land  at  Corporation's  Factory 
Typewriters  Purchased  (12) 

Net  Profit  as  per  Books 


600 

700 

1,000 

1,100 

100 

4,000 

2,000 

5,000 

9,000 

20,000 

1,500 


100,000 

25,000 

1,000 

16,920 

11,000 

80 , 000 

50,000 

20,000 

10,000 

70,000 

700 

240,000 

9,900 

300 

60 , 000 

500 

3,000 

9,000 

8,000 

1,200 

4,500 

600 

700 

990 

1,200 


$5,500,000 
2,200,000 

$3,300,000 


45 , 000 


$3,345,000 


724,510 
$2,620,490 


Assume  that  the  amount  reported  as  Pension  Fund  comes  from 
the  corporation  organizing  a  separate  company,  which  deducted  a 
certain  amount  from  each  employee's  wages  for  the  purpose  of 
providing  pensions  at  a  later  time.  The  full  amount  of  wages, 
including  the  part  withheld,  has  been  deducted  under  Cost  of 
Goods  Sold. 

The  following  information  in  regard  to  other  income  items  has 
been  furnished.   Land,  valued  at  $4,000  was  donated  to  the  cor- 
poration by  the  city  in  which  it  located,  as  an  inducement  to 
manufacture  there.  The  rent  income  is  from  property  purchased 
near  the  factory,  the  upkeep  of  the  property  being  $1,000, 
which  amount  has  been  deducted  as  expense.  Employees'  Restau- 
rant Profits  arose  through  the  company  having  a  restaurant  in 
the  factory  for  the  benefit  of  factory  help.   The  assessment  of 
stockholders  came  about  through  a  voluntary  levy  by  the  corpora- 
tion against  the  stockholders  who  bought  stock  below  par. 

Concerning  certain  expense  items,  the  following  is  noted. 
The  bonus  to  officers  was  paid  at  Christmas  time.   Organization 
expenses  consisted  of  Incorporating  Fees,  attorney's  fees,  audi- 
tor's fees,  and  office  salaries  during  the  first  few  days  of  or- 
ganization. Fines  were  levied  for  violation  of  certain  Child  Labor 
Law  Requirements,  and  losses  were  incurred  through  law  suits  for 
failure  to  fulfill  certain  contracts  of  sale. 

When  stock  was  sold,  it  was  disposed  of  at  a  discount.   In 
addition,  the  underwriters  withheld  a  commission.   During  the 
year,  the  company  bought  back  and  placed  in  the  Treasury  certain 
stock,  having  sold  it  originally  for  $90,000  and  having  paid 
$110,000  to  retire  it.   When  dividends  were  paid,  part  were  dis- 
tributed in  cash,  and  part  in  scrip,  the  company  giving  interest 
on  the  latter  for  deferment  of  payment,  finally  paying  in  cash 
both  the  scrip  dividends  and  the  interest  on  these  dividends. 
The  value  of  American  Corporation  Stock  Owned  had  dropped  on  the 
Market  $300  by  Dec.  31,  1921.  The  payment  of  amounts  to  the 
State  Compensation  Insurance  Fund  is  made  monthly  and  required 
by  law.  The  company  agreed  in  its  bond  issue  to  pay  2%  to  the 
Government  of  the  amount  paid  out  in  interest  to  bondholders. 
The  bonds  were  sold  by  the  company  at  a  discount  of  one  hundred 
thousand  dollars,  the  bonds  being  due  and  payable  in  ten  years. 

Regarding  donations,  the  company  permitted  the  Y.  M.  C.  A.  to 
erect  a  building  on  its  land,  so  that  its  own  help,  with  others, 
might  receive  more  direct  benefits,  and,  to  assist  its  own  em- 
ployees, the  company  made  a  donation  to  the  Y.  M.  C.  A.  The  do- 
nation to  the  school  operated  by  the  corporation  was  occasioned 
by  the  fact  that  employees  under  a  certain  age  are  required  by 
State  Law  to  attend  school  evenings.  To  assist  its  employees 
the  corporation  financed  its  own  school, 


Prom  the  foregoing,  the  correct  taxable  income  of  the  corpo- 
ration is  $3,080,200,  computed  as  follows: 


Net  Profit  as  per  Books 

Items  deducted  on  books,  not  allowed  as  expense, 

and  which,  when  not  subtracted,  increase  income: 

Interest  on  Loan  to  Purchase  Liberty  Bonds 

Organization  Expenses 

Discount  on  Stock  Sold 

Commissions  on  Stock  Sold 

Loss  on  Re-purchase  of  Corporation's  Own  Stock 

Dividends  Paid 

Federal  Income  Tax  for  1921 

Decrease  in  Market  Value  of  Stock  Owned 

Donations  to  Red  Cross 

Donations  to  Y.  M.  C.  A.  for  Benefit  of  Help 

2%  Paid  to  Government  on  Bond  Interest 

Interest  on  Loans  to  Purchase  American  Corp.  Stock 

City  Tax  to  Grade  Land  at  Corporation's  Factory 

Typewriters  Purchased 

Income  adjusted  by  adding  Unallowable  Deductions: 
Less  Items  included  in  income  but  not  taxable: 

Interest  on  Liberty  Bonds  -  4th  Issue  $600 

Dividends  on  Stock,  American  Corporation  1000 

Interest  on  City  of  New  York  Bonds  100 

Land  Donated  to  Corporation  by  City  4000 

Assessment  of  Stockholders  20000 


$2,620,490 


600 

16,920 

80 , 000 

50,000 

20,000 

70,000 

240 , 000 

300 

500 

3,000 

1,200 

700 

990 

1,200 

$3,105,900 


25,700 


Taxable  Income 


$3,080,200 


The  items  of  expense  which  cannot  be  deducted  are  given  above. 
The  reasons  for  their  disallowance  are  various. 

Organization  Expenses  are  not  deductible,  nor  'depreciable',  but 
represent  capital  charges.  Organization  Expenses  should  appear  in 
the  Balance  Sheet  capitalized;  such  expenses  may  not  be  deducted 
later  or  prorated  over  several  years  as  expense.  They  are  not 
permitted  as  allowable  income-tE«  deductions. 

Discount  on  Stock  is  not  an  allowable  deduction  because  it  rep- 
resents a  valuation  account  showing  the  correct  amount  invested  through 
the  Capital  Stock  Account.  Thus,  if  the  corporation  sold  stock,  par 
value  $800,000,  at  90%,  receiving  $720,000,  its  usual  entry  would  be: 


Cash 

Discount  on  Stock 
Capital  Stock 


4720 , 000 
80,000 


$800,000 


The  Government  considers  this  transaction  as  an  investment  of 
$720,000.  The  discount  gives  thefcorrect  value  to  the  Capital 
Stock  Account.  It  is,  therefore,|not|an:iallowable  deduction. 
Commissions  on  Stock  are  not  allowable  deductions,  but  for  a  dif- 


-67- 

ferent  reason,  which  will  be  more  apparent  in  studying  a  corpora- 
tion's Invested  Capital.  In  the  case  of  commissions  paid  for 
the  sale  of  stock,  the  amount  expended  is  practically  an  organ- 
ization expense,  and  for  that  reason  not  deductible.  However, 
the  Government  considers  that  (constructively)  the  corporation 
has  received  the  ajnounts  paid  out  as  commissions,  and  then  compen- 
sated the  underwriting  company  for  its  selling  services,  whether 
the  underwriters  withheld  the  commissions,  or  received  them  after 
first  giving  the  gross  receipts  from  sale  of  stock  to  the  corpora- 
tion. Therefore,  Commissions  on  Stock  Sold  are  capitalized  and 
placed  in  the  Balance  Sheet,  whereas,  a  debit  account,  called 
Discount  on  Stock,  is  not  considered  an  asset,  but  a  reduction  of 
the  Capital  Stock  Account. 

Loss  on  Purchase  of  Treasury  Stock  is  not  an  allowable  deduc- 
tion. In  the  particular  case,  the  corporation  sold  certain  stock 
for  $90,000,  or  $10,000,  below  par.  It  retired  this  stock  by 
paying  $110,000  and  a  cash  loss  of  $20,000  resulted.  This  is 
not  an  allowable  deduction,  as  it  is  considered  a  capital  trans- 
action; that  is,  the  corporation  increased  its  capital  stock  in- 
vestment account  $90,000  originally  and  reduced  its  investment 
account  $110,000  when  the  stock  was  retired.  A  corporation  real- 
izes no  gain  or  loss  from  the  buying  and  selling  of  its  own  stock. 

Dividends  Paid  and  Federal  Income  Tax  Payable  may  not  be  deduct- 
ed, as  each  is  considered  a  distribution  of  a  corporation's  prof- 
its, the  former  to  stockholders,  the  latter  to  the  Government. 

Decrease  in  the  Market  Value  of  Stock  is  not  permitted  as  a 
deduction,  because  such  loss  is  not  realized  until  actual  sale. 
Usually  only  realized  losses  may  be  deducted. 

Donations  to  the  Red  Cross  may  not  be  deducted,  as  corpora- 
tions are  not  permitted  to  deduct  donations.  Donations  to  the 
Y.M.C.A.,  under  the  facts  stated,  may  not  be  deducted.  The  rule 
is,  that  corporations  may  deduct  for  donations  which  directly  . 
benefit  them,  and  which,  accordingly,  may  be  classified  as  "or- 
dinary and  necessary  expenses."  In  this  case,  the  company  has 
donated  $3,000  to  the  Y.M.C.A.,  located  on  the  corporation's 
land,  and  for  the  benefit  of  any  employees  of  the  corporation 
using  the  Y.M.C.A.  Despite  the  fact  that  there  is  apparently  a 
benefit  to  the  corporation  from  such  a  donation,  the  Government 
has  ruled,  through  decision,  August  1921,  that  such  donation 
to  the  Y.M.C.A.  is  not  sufficiently  a  necessary  business  expense 
to  be  considered  deductible,  but  is  a  donation  and  not  deduct- 
ible. This  is  practically  contrary  to  previous  rulings,  but 
represents  the  present  attitude  of  the  Government  in  regard  to 
such  donations,  the  benefit  from  which  ultimately  reverts  to  the 
corporation. 

The  2%  of  the  $60,000  Bond  Interest  Paid,  or  $1,200,  which  the 
corporation  has  forwarded  to  the  Federal  Government,  is  not  de- 
ductible. This  is  a  voluntary  payment  of  an  individual's  income 
teix,  and  not  considered  either  a  necessary  tax  payment  of  the 


business  or  an  ordinary  and  necessary  business  expense.  It  is 
in  the  nature  of  a  gift  to  a  bondholder. 

Interest  paid  on  loans,  the  money  from  which  is  used  to  pur- 
chase tax-exempt  securities,  is  not  deductible.  Therefore,  the 
$700  interest  paid  on  money  to  buy  Stock  in  an  American  Corpora- 
tion may  not  be  deducted.  However,  an   exception  to  the  rule  is, 
that  interest  paid  on  money  used  to  purchase  Liberty  Bonds  may  be 
deducted  as  a  corporation  expense  provided  the  bonds  were  purchased 
after  Sept.  24,  1917,  and  during  the  several  drives.  Therefore,  in 
this  problem,  the  $700  paid  on  loans  to  buy  stock  in  an  American 
Corporation,  the  dividends  from  which  are  exempt,  is  not  deducti- 
ble, also  the  interest  paid  on  money  used  to  buy  Liberty  Bonds  is 
not  deductible,  as  the  corporation  is  new  and  must  have  purchased 
the  bonds  recently. 

The  City  Tax  to  grade  the  company's  land  is  not  deductible, 
as  it  is  called  in  the  Law  -  a  local  benefit  tax,  and  should  be 
capitalized,  increasing  the  cost  of  the  land  to  the  corporation. 
The  typewriters  purchased  may  not  be  deducted,  as  they  are  as- 
sets, and  should  be  capitalized. 

The  foregoing  items  may  not  be  deducted,  for  the  reasons 
stated.  Several  items  that  have  been  deducted  require  comment. 

The  Bonus  to  officers  has  been  deducted.  Although  this  was 
paid  at  Christmas  time,  the  usual  conclusion  is  to  consider  such 
a  bonus  as  additional  compensation,  unless  the  evidence  is  very 
strongly  to  the  contrary.  Fines  for  violation  of  the  law  and 
losses  in  law  suits  are  usually  deductible.  There  is  an  occasion- 
al exception  to  this  rule.  Interest  on  scrip  dividends  is  allow- 
able as  a  deduction,  it  being  considered  an  ordinary  interest 
charge  payable  by  the  company  because  it  did  not  have  sufficient 
cash  to  pay  dividends  when  declared.   Interest  on  bonds  and  notes 
payable  is  deductible.  Compulsory  annual,  monthly  or  other 
periodic  payments  to  State  Workmens  Compensation  Act  Funds  are 
deductible.   (Gov.  Decision).  Donations  to  a  school  operated  by 
the  corporation  to  assist  in  fulfilling  certain  legal  requirements 
regarding  employees  are  allowable  as  deductions.  (Gov.  Decision.) 

Regarding  income,  certain  items  in  the  corporation's  profit  and 
loss  statement  are  not  taxable.  Interest  on  Liberty  Bonds,  4th 
issue,  are  exempt,  as  $130,000  of  such  bonds  may  be  owned  before 
the  interest  received  on  them  is  taxable.  Interest  from  Bonds 
of  an  American  Corporation  is  taxable,  also  Dividends  on  Stock 
of  a  Foreign  Corporation  making  no  profit  here,  but  Dividends  from 
Stock  of  an  American  Corporation  are  not  taxable,  and  have  therefore 
been  eliminated  from  the  taxable  income.  The  corporation  which  paid 
the  dividends  has  already  been  subject  to  the  corporation  Income 
and  Excess  Profits  Taxes,  and  it  does  not  appear  equitable  to  tgtx 
a  second  corporation  receiving  profits  in  the  form  of  dividends, 
since  these  profits  have  already  been  tajced  once. 


Interest  on  City  of  New  York  Bonds  is  not  taxable,  as  explained 
previously.  Profit  on  the  sale  of  land,  or  any  other  capital  as- 
set, is  taxable.   (Supreme  Court  Decision.)  A  distinction  must  be 
drawn  between  the  profit  and  loss  on  the  sale  of  a  corporation's 
capital  stock,  and  the  sale  of  so-called  capital  assets.  The 
former  when  bought  and  sold  by  a  corporation  merely  alters  a  com- 
pany's investment;  the  latter,  however,  represents  the  buying  and 
selling  of  assets,  the  same  as  in  the  case  of  merchandise,  and 
when  sold  at  a  profit  or  loss,  the  gain  or  loss  is  taxable  or 
deductible,  as  the  case  may  be. 


Land  donated  to  the  corporation  is  not  taxable  as  income, 
proper  entry  when  such  land  is  received  is  the  following: 


The 


Land 


$4,000 
Donated  Surplus 


$4,000 


The  gift  thus  received  is  considered  an  additional  investment 
in  the  company,  almost  the  same  as  premium  on  stock,  except  that, 
preferably,  it  is  credited  or  placed  in  a  separate  Donated  Sur- 
plus Investment  Account.  Usually  gifts  to  a  corporation  are  so 
treated,  although  there  occasionally  are  exceptions. 

A  pension  fund,  withheld  from  payrolls,  where  the  latter  have 
been  deducted  in  full,  is  income  and  taxable.   (Gov.  Decision.) 
The  Assessment  of  Stockholders,  whereby  the  company  received  $20,000, 
is  looked  upon  as  asking  the  stockholders  to  increase  the  price  they 
paid  for  their  stock,  and  should  be  credited  either  against  any  Dis- 
count on  Stock  Account  in  the  Balance  Sheet  or  to  a  Special  Surplus 
or  Premium  on  Stock  Account.   It  represents  additional  investment 
2uid  not  income. 

Profits  from  an  employees'  restaurant  within  the  factory  are 
taxable,  likewise  any  loss  resulting  from  its  operation  would  be 
deductible . 


The  foregoing  explains  the  obtaining  of  a  corporation's  cor- 
rect taxable  income.  However,  in  writing  a  corporation  tax  return, 
it  is  necessary  to  list  any  differences  between  book  income  and 
taxable  income  in  a  special  schedule,  and  properly  reconcile  such 
changes  with  the  Surplus  Account.  This  will  be  explained  fully 
when  a  corporation  return  is  written  in  Lecture  II. 

All  corporations,  except  those  specifically  exempt,  are  sub- 
ject to  the  taxes.   The  word  "corporation",  as  used  in  the  law, 
includes  joint-stock  companies,  associations  and  insurance  com- 
panies, as  well  as  incorporated  concerns.  Domestic  corporations 
are  tajced  on  all  income,  no  matter  where  earned,  whereas  foreign 
corporations  are  talced  only  on  income  derived  from  sources  within 
the  United  States. 


-70- 


LECTURE  7. 
Questions  to  be  Answered. 

1.  (a)  Name  the  two  federal  taxes  levied  against  corporation  income 
(b)  Are  other  organizations  than  corporations  subject  to  these 

taxes? 

2.  (a)  A  grain  elevator  corporation  is  formed,  to  which  all  stock- 
holders ship  wheat  grown  by  themselves,  the  profits  therefrom  be- 
ing distributed  according  to  the  quantity  and  quality  of  wheat 
furnished  by  stockholders.  Is  such  a  corporation  taxable? 

(b)  A  fruit  growers  organization  is  formed  which  receives  fruit 
on  consignment  from  growers,  paying  for  it  when  sold.  Only  stock- 
holders can  forward  goods  to  the  organization,  which  distributes 
profits  to  stockholders  in  proportion  to  their  stock  holdings. 

Is  the  corporation  taxable? 

(c)  A  hunting  and  gun  club,  not  organized  for  profit,  has  been 
cutting  timber  from  its  lands  for  the  last  five  years  and  dispos- 
ing of  it  at  profit.  Is  the  organization  taxable  as  a  corporation? 

3.  A  corporation  sold  $100,000  in  bonds,  -  payable  in  ten  years,  - 
for  $90,000,  to  pay  6%  interest  annually.   It  also  sold  $100,000 
in  stock,  for  $90,000  or  at  a  10%  discount.  Is  there  any  dif- 
ference in  reporting  these  transactions  for  tax  purposes? 

4.  What  general  group  of  deductions  allowed  individuals  is  not 
allowed  corporations? 

5.  A  corporation  received  the  following  income  items:  Dividends  . 
on  stock  of  a  Foreign  Corporation  which  makes  25%  of  its  profits 
in  the  United  States,  Interest  on  Bonds  of  the  same  corporation. 
Stock  Dividends,  Cash  Dividend  from  an  American  Corporation  and  In- 
terest on  Scrip  Dividends.  Which  are  taxable? 

6.  A  corporation  reports  the  following  expenses:  Donations  to 
Red  Cross,  K.  of  C,  and  Y.M.C.A.  War  Drives,  Donations  to  Repub- 
lican Convention,  Pensions  to  former  employees,  5%  Gift  to  offi- 
cers and  employees  above  regular  compensation  received.  Dues  to 
manufacturers  association  and  local  chamber  of  commerce.  Incor- 
poration Fees,  and  Commission  for  selling  stock.  Which  are 
allowable  income-tajc  deductions? 

7.  A  corporation  has  a  Capital  Stock  Account  of  $500,000  and  a 
Bond  Payable  Account  of  $300,000.  A  second  corporation  leases 
its  entire  factory  by  agreeing  to  pay  6%  dividends  to  the  stock- 
holders directly  and  5%  to  the  bondholders.  The  first  corporation 
does  not  operate,  therefore,  during  the  year,  but  its  bondholders 
BXid   stockholders  were  paid  by  the  lessee  corporation  as  agreed. 
Does  such  a  corporation  have  to  file  a  return  or  pay  a  t2uc? 


r 


-71- 


LECTURE  8. 

INVESTED  CAPITAL 

Part  1. 

Invested  Capital,  in  general,  consists  of  the  net  assets 
and  property,  properly  valued,  invested  in  a  company  at  time 
of  incorporation,  plus  additional  investments  thereafter  and 
plus  any  Earned  Surplus  left  in  the  corporation. 

To  compute  Invested  Capital  it  is  necessary  first  of  all  to 
analyze  the  original  investment  made  at  the  beginning  of  a  corpora- 
tion's existence.  When  corporation  stock  is  sold,  naturally  it 
is  exchanged,  either  for  money  or  for  property,  the  latter  being 
tangible  or  intangible.  After  a  Corporation  operates  a  year,  it 
has  either  made  a  profit  or  suffered  a  deficit.  Invested  Capital 
upon  incorporation,  therefore,  represents  the  following: 
(1)  The  actual  cash  paid  in  for  stock,  regardless  of  the  par  value 
of  the  stock;  (2)  the  cash  value  of  any  tangible  property  given 
in  exchange  for  stock;  (3)  the  cash  value  of  any  intangible  pro- 
perty given  in  exchange  for  stock  (but  not  to  exceed  a  defined 
limit)  and  (4)  any  Paid-in  Surplus  (explained  later).  To  illus- 
trate, a  Corporation  begins  business  by  selling  stock  of  a  par  value 
of  $100,000,  as  follows:  300  shares  at  $100  each  for  $30,000  in 
cash;  500  shares  valued  at  $100  par  each  for  plant  and  equipment 
worth  $50,000  and  200  shares  of  stock  at  $100  par  each  for 
$20,000  in  Good  Will.  It  also  borrowed  $10,000  from  a  bank. 
At  the  beginning  its  Balance  Sheet  would  read  somewhat  as  follows: 


Assets 

Cash $40,000 

Plant  and  Equipment 50,000 

Good  Will  20,000 


Liabilities 
Capital  Stock    ..$100,000 
Loans  Payable 10,000 


$110,000 


$110,000 


The  Invested  Capital  in  the  above  case  would  be  $100,000,  not 
because  the  Capital  Stock  reads  $100,000,  but  because  $100,000 
in  cash  and  property  values  was  given  in  exchange  for  the  Capital 
Stock.  The  $10,000  Loans  Payable  Account  is  not  part  of  the  in- 
vestment, for  borrowed  money  is  not  Invested  Capital.  The  same 
thing  is  true  when  Bonds  Payable  and  similar  accounts  appear  on  a 
Balance  Sheet;  they  represent  borrowed  capital  and  should  not  be  in- 
cluded in  Invested  Capital. 

To  illustrate  further,  suppose  this  same  Corporation  had  sold 
its  stock  as  follows:  150  shares,  par  value  $15,000,  at  90%,  re- 
ceiving $13,500;  the  next  150  shares,  par  value  $15,000,  at  120%, 
receiving  $18,000;  the  next  500  shares,  par  value  $50,000  for 
plant  and  equipment  worth  $51,000;  and  200  shares,  par  value 
$20,000,  for  Good  Will  worth  $18,000;  and,  further,  suppose  the 
same  loan  of  $10,000  was  made.  The  balance  sheet  from  the  fore- 
going would  read  somewhat  as  follows: 


-72- 


Assets 

Cash $41,500 

Plant  &  Equip 50,000 

Good  Will 20,000 

Stock  Discount 1,500 


Liabilities 

Capital  Stock $100,000 

Stock  Premium 3,000 

Loans  Payable 10,000 


$113,000 


$113,000 


The  Invested  Capital,  from  the  foregoing  facts  and  above 
Balance  Sheet,  would  be  $100,500;  that  is,  the  Capital  Stock 
alone  does  not  represent  the  capital  invested  in  a  corporation 
unless  it  was  exchanged  for  property  worth  exactly  the  par  value 
of  the  Capital  Stock  issued.  In  the  above  case  cash  sumounting  to 
$13,500  and  $18,000  was  received  for  stock  and  a  building  and 
equipment  worth  $51,000,  plus  Good  Will  valued  at  $18,000. 
The  total  of  these  is  $100,500,  which  is  the  Invested  Capital, 
being  the  amount  invested  in  a  corporation  in  exchange  for  its 
Capital  Stock.  Reverting  to  the  definition  of  Invested  Capital 
it  consists  of  the  cash  paid  for  the  stock,  the  value  of  tangible 
property  paid  for  it,  the  value  of  intangible  property  paid  for 
it  and  the  Paid-in  Surplus,  and  computing  Invested  Capital  accord- 
ing to  the  above  facts  and  in  conformity  with  the  rules,  it  is 
readily  seen  that  $100,500  represents  the  correct  ajnount  invested. 
The  excess  of  plant  value  over  the  par  value  of  stock  exchanged 
therefor,  or  $1,000,  is  called  Paid-in  Surplus. 

In  the  course  of  the  year,  assume  that  the  Corporation  made 
a  $25,000  profit,  and  paid  out  $10,000  in  dividends,  its  balance 
at  the  beginning  of  the  next  year  would  then  read  somewhat  as 
follows: 


Assets 

Cash $20,000 

Plant  &  Equipment...  50,000 

Good  Will 20,000 

Inventory 30,000 

Accts.  Receivable...  11,500 

Stock  Discount 1 ,  500 

$133,000 


Liabilities 

Capital  Stock $100,000 

Stock  "Premium 3,000 

Loans  Payable 10, 000 

Surplus 15,000 

Plant  Reserve 5,000 


$133,000 


The  Invested  Capital  in  the  above  problem  is  $115,500 
obtained  as  follows:  Use  all  the  figures  in  the  old  problem, 
where  the  investment  was  $100,500  and  add  to  the  amount,  the 
Earned  Surplus  left  in  the  business.  Invested  Capital  is  comput- 
ed as  of  the  beginning  of  the  year.  It  has  been  assumed  that  the 
Corporation  made  $25,000  but  left  only  $15,000  of  it  in  the 
business  as  "Surplus"  as  of  the  beginning  of  the  next  year.  The 
next  item,  therefore,  that  makes  up  Invested  Capital  is  the 
Earned  Surplus,  which  is  added  to  the  Invested  Capital.  There- 
fore, in  general.  Invested  Capital  represents  the  four  items 
given,  ordinarily  making  up  the  corporation's  original  investment, 
gmd  to  this  original  investment  is  annually  added  any  Earned 


-73- 

Surplus  left  in  the  business,  the  five  together  in  general  giving 
the  Invested  Capital.   In  the  foregoing  problem,  the  Invested 
Capital,  as  of  the  beginning  of  the  second  year  might  be  obtained 
in  a  detailed  manner  as  follows: 

Capital  Stock $100,000 

Surplus 15,000 


Invested  Capital  as  per  books $115,000 

Add  Premium  on  Stock 3,000 

Add  Paid-in  Surplus  on  Plant  &  Equipment 1^000 


$119,000 


Deduct   Stock  Discount $1,500 

Good  Will  Reduction 2,000 


$3,500 3,500 


Invested  Capital $115 ,  500 

With  the  above  as  a  general  starting  point,  the  various 
rules  covering  Invested  Capital  will  be  considered: 

Several  terms  require  explanation.  BORROWED  CAPITAL  means 
Capital  received  which  must  at  some  time  be  returned  and  which, 
consequently,  is  a  Liability  and  not  part  of  Invested  Capital. 
INTANGIBLE  ASSETS  are  defined  by  law  to  include  only  such  items  as 
Patents,  Copyrights,  Good  Will,  Secret  Formulae,  Trade  Marks, 
Trade  Brands,  Secret  Processes,  and  the  like.   TANGIBLE  PROPERTY 
includes  all  assets  not  coming  under  the  heading  of  Intangible 
Property  and  has  been  defined  to  include  such  accounts  as  Lease- 
holds, Notes  Receivable,  Accounts  Receivable,  etc.   INADMISSIBLE 
ASSETS  are  those  assets  the  income  from  which  is  ordinarily  not 
taxable,  such  as  the  income  from  State  bonds  owned  or  stock  owned 
by  one  corporation  in  another.  These  assets  are  not  admitted  to 
the  Balance  Sheet  at  their  full  value  for  purposes  of  computing 
Invested  Capital  and  hence  are  called  Inadmissible  Assets. 

To  illustrate  the  above  terms  the  following  Balance  Sheet 
is  given. 

Assets  Liabilities 

Cash  Accounts  Payable 

Plant  Notes  Payable 

Patent  Rights  Capital  Stock 

Good  Will  Surplus 

Accounts  Receivable  Loans  Payable 
Inventories 
State  Bonds  Owned 
Corporation  Stocks  Owned 

In  the  foregoing  group  Capital  Stock  and  Surplus,  as  of  the 
beginning  of  the  year,  ordinarily  represent  Invested  Capital.  Loans 
Payable  and  Notes  Payable  are  classified  as  Borrowed  Capital  and  not 


-74- 


part  of  Invested  Capital.  Accounts  Payable  are  considered  ordinary 
Liabilities  and  not  part  of  the  corporation's  investment. 

Among  the  Assets  given  above,  the  following,  for  purposes  of 
Invested  Capital,  are  called  Tangible  Assets;  Cash,  Plant, 
Accounts  Receivable,  Inventories,  State  Bonds  Owned,  Corporation 
Stocks  Owned;  Intangible  Assets  consist  of  Patent  Rights  and 
Good  Will;  Inadmissible  Assets  consist  of  State  Bonds  Owned  and 
Corporation  Stocks  Owned.  Both  Intangible  Assets  and  Inadmissible 
Assets  are  subject  to  special  valuations  for  purposes  of  Invested 
Capital  and  hence  must  first  be  classified  as  above. 

BORROWED  CAPITAL:  Wherever  the  Corporation  borrows  money, 
giving  in  exchange  notes,  debentures,  etc.,  the  amount  may  not  be 
added  to  the  Invested  Capital.  However,  even  so-called  preferred 
stock  may  be  considered  Borrowed  Capital  instead  of  Invested 
Capital.  If  either  the  payment  of  the  interest  on  the  stock  or 
the  payment  back  of  the  money  given  therefor  ranks  ahead  of  or 
with  that  of  the  claims  of  general  creditors,  then  the  stock  is 
considered  a  loan,  in  fact  a  bond  issue,  with  merely  the  title  of 
stock,  and  not  allowed  as  part  of  Invested  Capital.  If  salaries  are 
owed  to  officers  and  appear  on  the  corporation's  books,  but  are  left 
in  the  business  by  consent,  these  amounts  are  usually  considered 
Borrowed  Capital.  If  interest  is  payable  on  such  accounts,  or  if 
the  rights  to  claim  the  amounts  rank  ahead  of  those  of  the  general 
creditors,  then  they  are  considered  Borrowed  Capital;  but  if  no  inter- 
est is  paid  on  them  and  they  rank  after  general  creditors  in  case 
of  liquidation,  they  form  part  of  Invested  Capital. 

INTANGIBLE  ASSETS  when  purchased  for  cash  are  permitted  to 
be  valued  at  their  cash  value;  when  purchased  for  stock  they  may 
not  exceed  (1)  their  actual  cash  value,  (2)  the  par  value  of  the  stock 
given  therefor,  (3)  25%  of  the  outstanding  stock  as  of  March  3,  1917, 
or  (4)  25%  of  the  outstanding  stock  as  of  the  beginning  of  the  taxable 
year,  whichever  of  the  four  values  is  lowest.  As  previously  ex- 
plained. Invested  Capital,  -  other  things  being  equal,-  would  ordi- 
narily consist  of  Capital  Stock  and  Surplus;  conversely,  the 
Invested  Capital  would  consist  of  Assets  less  Liabilities,  or  the 
Net  Asset  value  of  a  corporation.  Consequently,  any  reduction  in 
the  asset  value  of  Intangibles  results  in  the  reduction  of  Invested 
Capital.  To  illustrate  the  computation  of  Intangible  Asset  values, 
assume  the  following  Balance  Sheet  existed  as  of  January  1,  1921: 

Liabilities 
Capital  Stock      $100,000 
Surplus  20 , 000  ' 

Accounts  Payable     23,000 


Assets 

Cash 

$35 . 000 

Accounts  Receivable 

18.000 

Inventory 

20 , 000 

Plant 

20,000 

Patents 

20 , 000 

Good  Will 

30 . 000 

$143,000 

$143 . 000 


-75- 

Assume,  further,  that  the  Patents  were  purchased  for  cash, 
that  the  Good  Will  was  purchased  for  stock  and  worth  about  $35,000 
at  the  time  it  was  acquired  and  that  the  company  had  outstanding 
Capital  Stock  of  $110,000  as  of  March  3,  1917. 

As  the  Balance  Sheet  now  reads,  the  Invested  Capital  for  1921 
would  be  $120,000  or  the  Capital  Stock  plus  Surplus.  From  the 
facts,  however,  it  may  be  necessary  to  adjust  the  Invested  Capital 
because  of  the  purchase  of  Intangible  Assets.  The  Patents  (Intan- 
gibles) were  purchased  for  cash  and,  therefore,  no  reduction  in 
value  is  required.   The  Good  Will,  however,  was  purchased  for  stock 
euid  is  subject  to  the  limitations  just  outlined.   It  appears  that 
the  Good  Will  was  worth  $35,000  when  acquired,  that  it  was  ex- 
changed for  $30,000  worth  of  stock  -  par  value,-  that  25%  of  the 
outstanding  stock  March  3,  1917,  was  $27,250  and  that  25%  of  the 
outstanding  stock  January  1,  1921,  was  $25,000.   The  Good  Will, 
or  any   Intangible  Asset  purchased  for  stock,  may  not  exceed  the 
lowest  of  the  four  above  figures;  therefore.  Good  Will  may  not 
exceed  in  value  $25,000  for  purposes  of  Invested  Capital.   Conse- 
quently, the  Invested  Capital  of  $120,000  is  reduced  $5,000,  leav- 
ing it  at  $115,000.   This  rule  will  be  further  explained  in  the 
writing  of  the  corporation  return  in  Lecture  11. 

INADMISSIBLE  ASSETS:  Even  though  no  interest  is  received  on 
such  assets  during  a  year,  they  are  still  classified  as  Inadmissible 
and  even  though  the  taxpayer  is  willing  to  report  any  income  received 
through  them,  the  assets  will  still  be  considered  Inadmissible. 

Only  in  two  cases  may  Inadmissible  Assets  be  considered 
Admissible.   (1)   If  part  of  the  profit  from  a  so-called  Inadmissi- 
ble Asset  is  due  to  the  sale  of  it,  then  the  ratio  of  the  profit 
on  the  sale  to  the  total  income  from  the  Inadmissible  gives  the  ratio 
which  may  be  used  in  computing  that  fractional  part  of  the  Inadmissi- 
ble allowed  as  Admissible.   (2)  Secondly,  if  interest  is  being  paid 
out  on  loans  to  purchase  Inadmissible  Assets  it  may  be  possible  to 
consider  a  fractional  part  of  the  Inadmissibles  as  Admissibles. 

To  illustrate  case  (1)  above,  suppose  a  corporation  owns 
$50,000  worth  of  Standard  Oil  Stock  and  $60,000  worth  of  Bethlehem 
Steel  Stock;  dividends  received  from  both  of  these  are  non-taxable. 
Suppose  on  April  1st  the  corporation  sells  $40,000  worth  of  the 
Steel  Stock  for  $42,000,  making  a  profit  of  $2,000;  also  suppose 
that  during  the  same  year  the  corporation  received  $3,000  and  $2,500 
respectively  in  dividends  from  Oil  Stock  and  Steel  Stock,  then  the 
company  made  a  profit  of  $7,500  on  the  two  Inadmissible  Assets  for  the 
year.  Under  the  special  rule  here  explained,  each  group  of  Inadmis- 
sibles must  be  treated  separately;  hence,  the  $3,000  of  income  from 
Oil  Stock  is  not  taxable  and  the  asset  remains  Inadmissible.  However, 
of  the  $4,500  profit  on  Steel  Stock  $2,500  is  non-taxable  and 
$2,000  taxable.  Therefore,  $2,000  over  $4,500,  or  4/9  of  the 
total  Steel  Stock  owned;  Is  considered  admissible.  However,  it  is 
Admissible  only  while  held  2uid  up  to  the  date  of  sale.  Therefore, 
of  the  total  Steel  Stock  owned,  -  $60,000,  -  4/9  of  it,  or  $26,667, 
is  considered  Admissible  from  January  1st  to  April  1st,  and  the 


\ 


-76- 

balance,  $33,333,  is  considered  Inadmissible  from  January  1st  to 
April  1st,  while  from  April  1st  to  the  end  of  the  year  the  remain- 
ing unsold  $20,000  balance  of  Steel  Stock  is  considered  Inadmissi- 
ble. Properly  averaged,  the  Steel  Stock,  which  read  $60,000 
January  1st  and  $20,000  December  31st  on  the  Balance  Sheet,  is 
Inadmissible  to  the  extent  of  $33,333  for  the  first  three  months 
of  the  year  and  to  the  extent  of  $20,000  for  the  rest  of  the  year, 
or  $23,333.   (This  is  equivalent  to  $20,000  Inadmissible  for 
twelve  successive  months  and  $13,333  inadmissible  for  three  suc- 
cessive months,  or  $3,333  for  the  year.   The  $3,333  plus  the  $20,000 
total  $23,333,  giving  the  Inadmissible  Asset  Value). 

To  illustrate  rule  (2)  above,  assume  that  a  corporation  owns 
$10,000  worth  of  State  Bonds  on  which  it  is  receiving  $700  annual 
interest;  also  that  the  corporation  borrowed  $10,000  with  which 
to  purchase  these  Bonds  and  pays  $600  interest  annually  on  the  loan. 
The  $700  is  not  taxable  income  and  the  $600  not  an  allowable 
expense;  which  is  equivalent  to  reporting  $600  of  the  $700  as 
income  and  then  deducting  the  $600  interest  paid  on  the  loan. 
This  being  the  case,  that  fraction  which  is  the  ratio  between  the 
unallowable  deduction  and  the  non-taxable  income  is  applied  against 
the  asset  to  determine  the  part  that  will  be  considered  Admissible. 
Therefore,  of  the  $10,000  Asset  Account,-  State  Bonds  Owned,  - 
6/7  of  it  ($600  over  $700)  is  considered  Admissible  and  only 
1/6  Inadmissible  for  the  year. 

The  above  two  examples  illustrate  the  only  cases  in  which 
Inadmissible  Assets  may  be  treated  as  partly  Admissible.  However, 
by  special  rule,  obligations  of  the  United  States,  although  tax 
exempt,  are  allowed  as  Admissible  Assets.   Therefore,  any  Liberty 
Bonds  owned,  whether  tameable  or  exempt,  are  Admissible  Assets. 
Obligations  of  the  District  of  Columbia,  United  States  possessions 
and  the  Federal  Farm  Loan  Boards  are  not  considered  obligations 
of  the  United  States  for  purposes  of  this  special  rule. 

With  the  above  outline  of  what  constitutes  Inadmissible  Assets, 
the  following  illustration  is  given  to  show  exactly  how  they  are 
computed  in  a  practical  problem: 


BALANCE 

SHEET 

Assets 

Jan. 

1, 

,  1921 

Liabilities 

Cash 
Accounts 
X  Stock 
Y  Stock 
Plant 
Invento I 

i  Receivable 

Owned 

Owned 

$15 , 000 
25 . 000 
60 . 000 
30 , 000 

100.000 
20 , 000 

Capital  Stock 
Surplus 

Accounts  Payable 
Plemt  Reserve 

* 

$150 . 000 
25 . 000 
40 , 000 
35.000 

$250,000 

$250 . 000 

-77- 


December 

31.  1921 

Assets 

Liabilities 

Cash 

$20 , 000 

Capital  Stock      $150,000 

Accounts  Receivable 

60 . 000 

Surplus             40,000 

X  Stock  Owned 

20 . 000 

Accounts  Payable      27,000 

Y  Stock  Owned 

30 , 000 

Plant  Reserve-       39.000 

Plant 

100 , 000 

Inventory 

26.000 

t 

$256,000 


$256,000 


X  Stock  Owned  and  Y  Stock  Owned  represent  investments  in 
other  corporations,  the  income  from  which  is  not  tameable. 
Ordinarily  Inadmissible  Assets  are  computed  for  purpose  of  re- 
ducing Invested  Capital  as  follows:  The  Inadmissibles  at  the  be- 
ginning of  the  year,  in  this  case  $90,000,  and  at  the  end  of  the 
year,  in  this  case  $50,000,  are  totalled  together  and  divided  by 
2,  giving  the  average  of  the  Inadmissibles  held  during  the  year,- 
in  this  case  $70,000.  ($90,000  plus  $50,000  divided  by  2).   Then 
the  total  assets  at  the  beginning  of  the  year,  in  this  case 
$250,000,  and  the  total  at  the  end  of  the  year,  in  this  case 
$256,000,  are  added  together  and  divided  by  2,  giving  an  average 
of  $253,000  for  the  year  for  Total  Assets.  Then  the  fraction 
70,000  over  253,000  or  70/253,  (being  the  ratio  of  Inadmissible  Assets 
over  Total  Assets)  is  applied  against  the  Invested  Capital  as  of 
the  beginning  of  the  year,-  in  this  case  $175,000.  (Capital  Stock 
$150,000  and  Surplus  $25,000).   The  result  of  70/253  times  $175,000 
is  the  amount  by  which  the  Invested  Capital  is  reduced  on  account  of 
a  corporation  owning  Inadmissible  Assets. 

However,  there  are  always  additonal  factors  to  be  considered 
in  computing  Inadmissible  Asset  reductions.   In  the  first  place, 
the  date  on  which  Inadmissibles  held  at  the  beginning  of  the  year 
were  sold  may  have  a  bearing  on  the  fractional  percentage,  as 
already  explained,  while  also  the  Total  Asset  value  may  not  be 
the  correct  Asset  Value,  this  depending  upon  the  facts  in  each  case. 

For  purpose  of  illustration  assume  that  $40,000  of  X  Stock 
in  the  foregoing  Balance  Sheet  was  sold  April  1,  1921;  assume, 
further,  that  there  was  a  profit  on  the  sale  of  X  Stock  to  the  amount 
of  $1600,  and  that  during  the  year  there  were  received  dividends 
on  X  Stock  of  $2400  and  dividends  on  Y  Stock  of  $2500.  The  latter 
amount  does  not  alter  the  Inadmissible  value  of  Y  Stock.  Of  the 
$4000  income  on  X  Stock,  however,  the  $1600  or  2/5  of  it,  received 
through  sale  April  1st  is  taxable;  therefore  2/5  of  X  Stock, - 
total  $60,000,  -  is  Admissible  from  January  1st  to  April  1st,  and 
the  remaining  $20,000  worth  unsold  is  Inadmissible  from  April  1st 
to  December  31st.  Therefore  3/5  of  the  $60,000  in  X  Stock,  or 
$36,000,  is  Inadmissible  for  the  first  three  months  of  the  year, 
which  is  the  same  as  $9,000  Inadmissible  for  the  entire  year, 
while  $20,000  in  X  Stock  is  Inadmissible  for  nine  months,  which 
is  the  same  as  $15,000  Inadmissible  for  the  entire  year.  The  $15,000 
added  to  the  $9,000,  gives  a  total  average  of  $24,000  Inad- 
missible value  for  the  entire  year  for  X  Stock  Owned.  Therefore, 


-76- 

$54,000  is  the  average  Inadmissible  value  of  X  and  Y  Stock  Hot 
the  year,  in  this  particular  case,  or  $24,000  in  X  Stock  and 
$30,000  in  Y  Stock  Owned  Inadmissible.   Therefore,  instead  of 
$70,000  being  the  Inadmissible  Asset  value,  $54,000  is  the 
figure  used,  with  a  consequent  net  saving  to  the  taxpayer. 

Concerning  the  Total  Asset  Value,  it  reads  $250,000  at 
the  beginning  of  the  year,  but  the  Plsint  Reserve  Account,  listed 
under  the  Liabilities,  is  a  valuation  account  and,  when  subtracted 
from  the  Plant  Account,  gives  the  correct  value  of  the  latter 
asset.   Therefore,  the  Total  Assets  at  the  beginning  of  the  year, 
correctly  valued,  amount  to  $250,000  less  $35,000  reserve,  or 
$215,000.   Likewise,  at  the  end  of  the  year,  the  Total  Assets  of 
$256,000  are  reduced  by  the  Plant  Reserve  of  $39,000,  leaving 
the  Total  Asset  values  at  $217,000.   These  two  totals,  properly 
averaged,  amount  to  $216,000  (that  is,  $215,000  at  the  beginning 
and  $217,000  at  the  end  of  the  year).  Therefore,  $54,000  over 
$216,000  or  54/216  or  1/4  gives  the  ratio  of  Inadmissibles  to  the 
total  of  Admissible  and  Inadmissible  Assets.   This  ratio,  namely 
1/4  -  or  25%  -  is  multiplied  against  the  $175,000  of  Invested 
Capital,  resulting  in  $43,750,  which  amount  is  then  subtracted 
from  the  $175,000,  leaving  $131,250  as  the  Invested  Capital  in 
this  problem.  Stated  otherwise,  the  Inadmissible  Assets,  aver- 
aging $54,000  for  the  year,  are  not  admitted  to  the  Balance 
Sheet  for  $43,750  of  their  value. 

NOTE  CAREFULLY  that  the  assets  were  averaged  for  the  year, 
but  the  percentage  reduction  was  applied  against  the  Invested 
Capital  at  the  beginning  of  the  year.  NOTE  CAREFULLY  also  that, 
in  the  case  of  Inadmissible  Assets,  the  percentage  reduction  was 
applied  against  the  Invested  Capital,  while  the  limitation  on 
account  of  Intangibles  purchased  for  stock  is  always  calculated 
as  against  the  par  value  of  the  outstanding  Capital  Stock  only. 

When  bonus  stock  is  issued  with  bonds,  any  excess  in  sales 
price  of  the  bonds,  due  to  the  bonus,  gives  the  figure  at  which 
the  stock  may  be  added  to  Invested  Capital.  Thus,  a  corporation 
was  selling  bonds  at  $950  each,  but,  by  giving  bonus  stock  free 
with  bonds,  the  latter  sold  for  $980.  The  $30  difference  in  each 
bond  sold  should  be  placed  in  a  Capital  Stock  Account  and  consid- 
ered part  of  Invested  Capital.  Also  $50  (the  difference  between 
$1000  and  $950)  and  not  $20  represents  the  bond  discount  to  be 
amortized,  assuming  the  face  value  of  the  bonds  to  be  $1000. 

If  a  note  is  given  in  exchange  for  stock  such  note  is  a  Taui- 
gible  Asset  to  the  extent  of  its  cash  value  and  the  stock  given 
therefor  is  part  of  Invested  Capital.  This  is  permitted  if  any 
note  given  may  be  legally  used  to  purchase  stock  under  the  laws 
of  the  domicile  of  the  corporation,  and  if  such  note  is  legally 
enforceable  against  the  individual. 

Inadmissible  Assets  are  computed  in  the  same  meuiner,  regard- 
less of  whether  they  are  purchased  for  stocks,  bonds  or  cash, 
except  that  in  guiy  event,  they  should  be  listed  at  their  cash 


-79- 

value  when  acquired,  and  should  not  be  reduced  or  increased  on 

the  books  because  of  changes  in  their  market  value  after  acquisition. 

When  Tangible  and  Intangible  Assets  are  purchased  for  bonds 
and  stock,  it  will  be  presumed  by  the  Government  that  the  former 
were  given  for  the  purchase  of  the  Tangibles  and  the  stock  for 
the  balance  of  the  Tangibles  and  for  the  Intangibles,  the  purpose 
of  this  being  to  apply  the  limitation  on  the  purchase  of  Intangibles 
for  stock  in  the  particular  case.  Also  if  Tangibles  and  Intangi- 
bles are  purchased  for  stock  and  liabilities  assumed  at  the  same 
time,  the  latter  are  presumed  to  apply  as  a  reduction  against  the 
assumed  value  of  the  Tangibles,  again  causing  the  application  of 
the  rule  concerning  Intangibles  purchased  for  stock.  Evidence 
proving  the  contrary  may  be  introduced  in  either  of  the  foregoing 
cases. 

Intangible  property  may  not  be  valued  above  the  par  value  of 
the  stock  given  therefor.  Tangible  property,  however,  may  be,-  any 
excess  of  value  over  the  stock  given  therefor  being  called  "Paid- 
in  Surplus".  That  is,  if  a  company  gives  $100,000  in  stock-par 
value,  and  receives  in  exchange  a  building  worth  $110,000,  the 
$10,000  is  called  Paid-in  Surplus.  Substantial  proof  to  establish 
a  Paid-in  Surplus  to  be  used  for  purposes  of  Invested  Capital  is 
required.  Among  other  things,  an  appraisal  at  the  time  of  the 
acquisition  of  the  building  or  figures  covering  the  assessed  value 
over  a  period  of  years  may  be  introduced  to  show  value  in  excess  of 
the  par  value  of  the  stock.  Also  evidence  may  be  received  to  show 
that  the  stock  was  selling  above  par  at  the  time  the  building  was 
purchased.   In  every  case  the  evidence  of  Paid-in  Surplus  must  be 
AS  OF  THE  TIME  THE  ASSET  WAS  ACQUIRED.   That  is,  an  appraisal  at 
the  present  time  to  show  the  value  several  years  prior  Ac  the  pre- 
sent year  is  not  considered  proper  evidence.  By  decision,  an 
appraisal  approximately  a  year  before  or  after  such  asset  is  acquired 
has  been  allowed  as  sufficient  evidence  of  Paid-in  Surplus.   If 
the  additional  value  is  ascertained  or  developed  after  date  of 
acquisition,  no  Paid-in  Surplus  is  allowed. 


-80- 


LECTURE  9. 


INVESTED  CAPITAL  (Continued). 


So  far  it  has  been  pointed  out  that  Invested  Capital  consists 
of  the  investment  of  a  company  at  the  time  of  incorporation,  plus 
the  Earned  Surplus.  It  has  also  been  shown  that  Borrowed  Capital 
is  not  part  of  Invested  Capital,  and  that  Intangible  Assets  and 
Inadmissible  Assets,  when  properly  valued,  may  result  in  altering 
Invested  Capital.  Next  it  is  necessary  to  consider  the  Invested 
Capital  as  it  appears  on  the  books  to  see  whether  or  not  the  Surplus 
Account  represents  true  Earned  Surplus. 

Wherever  the  facts  show  that  Earned  Surplus  does  not  represent 
true  Earned  Surplus,  then  additions  and  deductions  should  be  made 
as  of  the  beginning  of  the  year.  There  are  several  instances  in 
which  such  adjustments  need  to  be  made. 

If  depreciation,  obsolescence  or  depletion  has  been  deducted 
from  Surplus  in  too  great  amounts  in  previous  years,  and  such  can 
be  satisfactorily  proved,  the  excess  may  be  added  to  Surplus  and 
be  made  a  part  of  Invested  Capital  as  of  the  beginnning  of  any  year. 
Thus,  a  concern  has  depreciated  its  plant  and  equipment  at  the  rate 
of  10%  up  to  January  1,  1917,  the  date  upon  which  Invested  Capital 
became  a  factor  in  computing  the  Income  Tax.  At  the  beginning  of 
1917  its  Balance  Sheet  may  read  somewhat  as  follows: 


Plant  and  Equipment 
Other  Assets 


$200,000  Capital  Stock 
100,000  Surplus 

PlEint  Reserve 

Liabilities 


$300,000 


$175,000 
50 , 000 
60 , 000 

15,000 

$300 , 000 


From  the  foregoing  Balance  Sheet,  apparently  $20,000  depre- 
ciation has  been  taken  for  three  successive  years.  If  the  facts 
show  that  only  5%   depreciation,  or  $10,000,  should  have  been  taken 
each  year,  then  the  excess  may  be  restored  to  Surplus.  Therefore, 
in  the  above  Balance  Sheet,  which  now  contains  a  Plant  Reserve 
Account  on  the  credit  or  right  hand  side,  $30,000  of  the  amount 
in  this  account  may  be  added  to  Surplus.  In  this  way.  Invested 
Capital  would  consist  of  Capital  Stock  $175,000,  Surplus  $50,000 
and  Addition  to  Surplus  $30,000,  or  a  total  of  $255,000.  This 
adjustment  is  permitted,  of  course,  only  when  amended  returns  for 
previous  years  are  made  out  and  the  errors  on  excessive  deprecia- 
tion corrected.  Likewise,  if  depreciation  taken  has  proved  too 
small,  the  Government  may  insist  upon  amended  returns  and  the  trans- 
ferring back  of  part  of  Surplus  into  the  Reserve  Account,  thereby 
reducing  Invested  Capital.  By  decision,  however,  the  Treasury 
Department,  during  the  last  few  months,  has  permitted  companies 
which  apparently  under-depreciated  in  prior  years  to  use  the  book 


value  of  the  assets,  if,  in  general,  it  can  be  shown  that  they 
represent  a  substantially  correct  Invested  Capital  value  as  of  the 
year  in  which  their  asset  value  is  used  for  Invested  Capital  purposes 

Amounts  expended  prior  to  January  1,  1917,  for  equipment  and 
assets  which  have  a  useful  life  extending  beyond  a  year  and 
which  have  been  charged  to  expense,  may  be  added  to  Invested 
Capital.   If,  however,  such  expenditures  were  recovered  through 
having  the  assets  added  to  Cost  of  Goods  Sold,  they  cannot  now  be 
restored  to  Invested  Capital.  If  such  equipment  and  assets  are 
used  only  occasionally,  their  Invested  Capital  value  should  be 
based  on  their  earning  capacity. 

If  Intangible  Assets  have  been  purchased  and  either  written 
off  the  books  or  excessively  depreciated,  they  may  be  readjusted 
and  a  proper  amount  added  to  Invested  Capital.   Thus,  if  Good  Will 
was  purchased,  and  then  written  down  to  the  value  of  one  dollar, 
it  may  be  restored  to  Invested  Capital  at  its  cash  value  when  pur- 
chased. 

There  is  one  exception  to  the  rule  that  items  excessively 
depreciated  or  written  off  may  be  restored  to  Invested  Capital. 
This  occurs  in  cases  where  money  has  been  expended  for  experimental 
expenses,  patent  development  expense  and  advertising  to  create 
Good  Will.   In  these  cases,  at  the  time  the  money  was  expended 
the  corporation  had  the  option  of  charging  part  of  the  amount 
as  asset  and  part  as  expense  and  the  law  on  this  point  reads,  that 
a  corporation  exercises  a  binding  option  at  the  time  such  ex- 
penditures are  made.  Thus,  if  a  corporation  spent  $1,000,000  in 
advertising  in  1910  and  charged  all  this  off  to  expense  except 
$10,000,  which  it  called  Good  Will,  it  is  not  now  permitted  to 
show  that  more  than  $10,000  in  Good  Will  was  acquired  through  the 
advertising.   So,  also,  if  a  corporation  expends  several  hundred 
thousand  dollars  in  developing  certain  patents  in  its  own  labor- 
atories and  charges  these  ajnounts  off  as  expense,  and  now  wishes 
to  increase  the  value  of  its  patents  by  amounts  expended  in  exper- 
imentation, this  also  is  not  permitted. 

Concerning  the  value  of  patents,  legally  patents  have  a  life 
of  seventeen  years  and,  therefore,  ordinarily  may  be  depreciated 
1/17  annually.  However,  their  value  depends  chiefly  upon 
their  earning  power  and  the  monopoly  which  a  business  concern 
may  have  over  certain  inventions.  Consequently,  if  it  appears 
that  a  patent  will  outlive  its  legal  life  of  seventeen  years,  then 
it  may  be  depreciated  at  a  less  rate  thgtn  1/17  a  year.  Also,  if 
it  appears  that  a  patent  in  all  probability  may  be  superseded  by 
another  in  the  course  of  two  or  three  years,  it  may  be  depreciated 
30  or  40  per  cent  a  year.  As  far  as  Invested  Capital  is  concerned, 
if  a  corporation  depreciated  patents  1/17  per  year  and  the  patent 
rights  themselves  had  not  depreciated  that  rapidly,  the  corporation 
may  not  now  restore  the  difference  to  Invested  Capital.   If,  however, 
a  corporation  merely  reduced  the  book  value  of  patents  1/17  and  took 
a  smaller  deduction  against  its  taxable  income,  then  the  difference 
may  be  restored  to  Invested  Capital. 


When  assets  are  appreciated  as  of  March  1,  1913,  there  is  no 
effect  upon  Invested  Capital.  Thus,  if  a  corporation  has  buildings 
valued  at  $100,000  on  its  books  as  of  March  1,  1913,  and  through 
appraisal  finds  that  the  buildings  had  a  market  value  as  of  that 
date  of  $125,000,  the  increase  may  be  placed  on  the  corporation 
books  but  should  be  debited  to  the  Asset  Account  and  credited  to 
£Ui  account  called  Surplus  From  Appreciation.  Thereafter  the  cor- 
poration may  depreciate  against  $125,000  in  asset  value  instead  of 
$100,000,  but  the  appreciated  value  is  not  permitted  as  part  of 
Invested  Capital.   If  the  corporation  should  sell  such  asset  and 
the  appreciated  value  thereby  become  realized,  it  is  then  allowed 
as  Invested  Capital  from  date  of  sale.  (See  Lecture  11  for  proper 
recording  of  Appreciated  Surplus.) 

So  far  in  this  Lecture  it  has  been  shown  that  Invested 
Capital  consists  first, 'of  the  amounts  invested  in  a  corporation 
and  second,  of  the  Earned  Surplus.  Next  it  has  been  shown  that 
excessive  depreciation  written  off  and  assets  charged  off  may 
be  restored  to  the  books,  thus  increasing  the  Earned  Surplus. 
Also  that  appreciated  value  is  not  part  of  true  Earned  Surplus. 

In  addition  to  the  foregoing,  there  are  in  general  a  group  of 
Reserves  which  usually  may  be  added  to  Invested  Capital.   These 
are  known  as  Unallowable  Reserves.   An  unallowable  reserve  is  one, 
the  additions  to  which  are  not  permitted  as  offsetting  allowable 
Income  Tax   deductions.  Thus,  a  concern  deducts  a  certain  amount 
annually  from  Surplus  and  places  it  in  an  Income  Tax  Reserve. 
As  pointed  out  previously.  Income  Taxes  may  not  be  deducted  as 
expenses.   Therefore,  if  an  Income  Tax  Reserve  appears  in  a 
Balance  Sheet  as  of  the  beginning  of  any  year,  it  should  be  con- 
sidered part  of  the  Invested  Capital  and  added  to  the  Capital 
Stock  and  Surplus.  Assume  that  a  Balance  Sheet  read  as  follows: 


Cash 

$150 , 000 

Capital  Stock 

$200,000 

Building 

100 . 000 

Surplus 

120,000 

Patents 

20 , 000 

Inventory  Reserve 

40,000 

Good  Will 

30 . 000 

Bad  Debt  Reserve 

25.000 

Inventory 

110,000 

Sales  Discount  Reserve 

5,000 

Accounts  Receivable 

60 . 000 

Income  Tax  Reserve 

9,000 

Sinking  Fund  Reserve 

71,000 

$470 . 000 

$470 , 000 

The  Invested  Capital  in  the  above  Balance  Sheet  reads  $320,- 
000,  that  is,  the  Capital  Stock  Account  plus  the  Surplus  Account. 
However,  the  correct  Invested  Capital  value  is  $470,000. 
It  will  be  noted  that  the  right  heuid  side  of  the  Balance  Sheet 
consists  of  five  Reserves.  Each  one  of  these  Reserves  is  known 
as  an  Unallowable  Reserve;  that  is,  no  deduction  is  usually 
allowed  for  fluctuation  of  inventory  values,  for  anticipated 
bad  debt  losses,  for  sales  discounts  taken  in  advance,  for  any 
Income  Tax  to  be  paid  or  for  sinking  fund  amounts  reserved. 
As  these  are  not  allowed  as  expenses,  the  effect  is  the  same  as 
if  the  deductions  resulting  in  these  five  Reserves  had  never 
been  made.   If  they  were  not  made,  the  Surplus  would  be  cor- 


respondingly  larger.  Hence  they  are  added  at  this  time  to  the 
Capital  Stock  euid  Surplus  Accounts.  Beginning  with  the  year  1921 
a  Bad  Debt  Reserve  may  represent  an  allowable  expense,  if  per- 
mission to  use  it  is  given  by  the  Commissioner. 

For  purposes  of  Invested  Capital  insurance  paid  on  officers  of 
a  corporation  is  usually  carried  at  its  cash  surrender  value  in  the 
Balance  Sheet. 

The  foregoing  rules,  as  outlined  in  Lectures  8  and  9,  are 
intended  to  show  how  InVfested  Capital  is  arrived  at  as  of  the 
beginning  of  the  taxable  year.   Certain  changes  may  occur  during 
the  year  which  also  affect  Invested  Capital.  Among  the  changes 
during  a  year  which  affect  Invested  Capital  are  the  payment  of  a 
corporation's  Income  Tax,  the  payment  of  dividends,  the  sale  of 
additional  stock  and  the  retirement  of  corporation  stock.  All 
these  items  are  carefully  explained  and  their  computations  worked 
out  in  Lecture  II. 


LECTURE  9. 


Questions  to  be  Answered. 


1.  Define 


Invested  Capital 
Borrowed  Capital 
Inadmissible  Assets 
Intangible  Assets 


2.  (a)  Which  of  the  following  are  Intangible  Assets:  Organization 
Expenses,  Commissions  on  Stock,  Notes  Receivable,  Accounts  Receiv- 
able, Good  Will,  Trade  Marks  and  Patent  Rights. 

(b)  Which  of  the  following  are  Inadmissible  Assets:  Liberty 
Bonds -First  Issue,  Liberty  Bonds -Fifth  Issue  4f,  State  Bonds  Owned, 
Stock  Owned  in  American  Corporation,  Stock  Owned  in  Foreign  Corpor- 
ation making  no  profit  here.  Stock  Owned  in  Foreign  Corporation 
making  70%  of  its  profits  here  for  the  last  four  years. 

3.  For  purposes  of  computing  the  tax,  which  of  the  following  items 
are  part  of  a  corporation's  Invested  Capital:   Capital  Stock,  Pre- 
ferred Stock,  Bonds  Payable,  Loans  Payable,  Earned  Surplus,  Surplus 
from  Appreciation  of  Assets,  Sinking  Fund  Reserve,  Reserve  for 
Building  New  Plant,  Depreciation  Reserve,  Taxes  Accrued,  and  Reserve 
for  Federal  Income  Taxes. 

4.  State  the  allowable  value  for  Patent  Rights  for  1921  in  the  fol- 
lowing cases:  Patent  Rights  worth  $50,000  were  purchased  for 
$45,000  in  stock  -  par  value  -  Dec.  1,  1915.  The  company  had  stock 
outstanding  of  $70,000  on  March  3,  1917,  and  $100,000  in  stock 
outstanding  on  Jsin.  1,  1921. 


5.  State  in  your  own  language  the  general  rule  for  computing  the 
reduction  of  Inadmissible  Assets  for  purposes  of  Invested  Capital. 


LECTURE  10 

COMPUTATION  OF  CORPORATION 
TAXES  IN  SPECIAL  CASES. 

Problem  1:  As  explained  in  Lecture  8,  the  ordinary  computation 
for  a  corporation's  Income  and  Excess  Profits  Taxes  for  1921  is  as 
follows: 

Invested  Capital  $500,000    8%  of  $500,000 $40,000 

Income  125,000    Specific  Exemption 3,000 


Excess  Profits  Credit. . .$43,000 


Excess  Profits  Tax 

Income     Credit  Bal.  Taxed 

20%  of  Invest.  Cap.  $100,000      43,000  57,000 

Over  20%            25,000          0  25,000 


Rate 
20% 
40% 


125 , 000 


43,000 
Income  Tax 

Income $125,000 

Profits  Tax 21,400 


82,000 


Income  lax   10%. 


Tax 
11,400 
10 , 000 

$21,400 

..10,360 


103 , 600 


Total  Tax  $31,760 


Problem  2:  If  a  corporation  has  income  of  less  than  $25,000, 
it  is  entitled  to  a  $2,000  exemption.  If  taxable  Liberty  Bond 
Interest  is  included  it  is  subject  to  the  Excess  Profits  Tax  only. 
If  a  tax  has  been  paid  to  a  foreign  country,  it  is  deductible  from 
the  tax  payable. 

* 

Invested  Capital $75 ,  000         8%  of  $75 ,  000 $6 ,  000 

Ir^come  21,000         Specific  Exemption 3,000 

Income  includes  Lib.  Bond  Int.  $100  

Excess  Profits  Credit  $9,000 


20%  of  Invest.  Cap. 
Over  20% 


Excess  Profit  Tax 

Income     Credit  Bal.  Taxed 

$15,000      9,000  6,000 

6,000  0  6,000 


Rate 
20% 
40% 


21 , 000 


Income 
Less: 

Liberty  Bond  Int. 
Profits  Tax 
Exemption 


9,000 
Income  Tax 

$21 , 000 

$100 
3,600 
2,000  5,700 


12,000 


Income  Tax 
Total  Tax 
Less: 

Foreign  Tax  Paid 
(Assumed) 


$15,300  Final  Tax 


Teix 

1,200 

2,400 

$3,600 

1,530 
5,130 


200 
$4,930 


Problem  3:  Computation  where  Excess  Profits  Credit  exceds  20% 
of  Invested  Capital. 


Invested  Capital $15,000 

Income  6,500 


8%  of-$15,000 $1,200 

Specific  Exemption     3,000 

Excess  Profits  Credit  $4,200 


Excess  Profits  Tax 

Income      Credit  Bal.  Tax  Rate 

20%  of  Invest.  Cap... $3, 000       3,000  0  20% 

Over  20%             3,500        1,200  2,300  40% 


Tax 
0 
$920 


The  Excess  Profits  Credit  of  $4,200  exceeds  20%  of  the  Invested 
Capital  -  or  $3,000.   In  such  case  that  part  of  it  needed  to  eliminate 
any  income  subject  to  the  20%  tax  is  used,  thereby  eliminating  the  tax 
at  the  20%  rate.   The  balance  of  the  Credit,  in  this  case  $1,200, is 
used  against  the  Income  in  excess  of  20%  of  the  Invested  Capital, 
thereby  reducing  it  before  the  40%  tax  is  levied.   In  the  above  case 
the  $1,200  balance  of  the  Credit  is  subtracted  from  $3,500,  -  the  in- 
come ordinarily  subject  to  a  40%  tax,  -  and  only  the  balance,  $2,300 
is  taxed  at  40%.   The  Income  Tax  is  computed  the  sajne  as  before  with 
Credits  of  $920  and  $2,000. 


Problem  4.  Section  302  of  the  New  1921  Act  (also  the  1918  Act) 
provides  special  relief  for  a  small  corporation  subject  to  a  high 
Excess  Profits  Tax.  This  Section  states  that  in  no  case  shall  the 
Excess  Profits  Tax  exceed  20%  of  the  income  above  $3,000  and  not  in 
excess  of  $20,000  and  40%  of  the  income  in  excess  of  $20,000.  . 

To  illustrate,  the  same  Invested  Capital  and  Income  figures  as 
in  Problem  3  above  may  be  used. 

The  amount  of  income  in  excess  of  $3,000  is  $3,500  (i.e.  $6,500 
less  $3,000).   The  Excess  Profits  Tax  may  not  exceed  20%  of  $3,500 
or  $700.  Therefore,  in  Problem  3,  the  corporation  does  not  pay  an 
Excess  Profits  Tax  of  $920,  but  $700  only. 

Problem  5:  Section  302  gives  relief  for  income  in  excess  of 
$20,000  as  follows: 


Invested  Capital 
Income 


$50,000  8%  of  50,000      $4,000 
22,000  Specific  Exemption  3,000 


$7,000 


20%  of  Invest.  Cap. 
Over  20% 


Excess  Profits  Tax 
Income      Credit    Bal.  Taxed  Rate 
$10,000       7,000       3,000    20% 
12,000  0      12,000    40% 


Tax 

600 
4,800 


22,000 


7,000 


15,000 


$5,400 


(Problem  5  continued) 

Computed  in  the  ordinary  way,  the  Excess  Profits  Tax  is  $5,400. 
Applying  the  relief  section,  the  tax  may  not  exceed  20%  of  the  income 
in  excess  of  $3,000  and  not  in  excess  of  $20,000  or  20%  of  $17,000 
and  40%  of  the  amount  in  excess  of  $20,000  or  40%  of  the  $2,000  of 
income  above  $20,000.  Therefore  the  tax  shall  not  exceed  20%  of 
$17,000  plus  40%  of  $2,000  or  $3,400  plus  $800  or  a  total  of 
$4,200. 

The  maximum  Excess  Profits  Tax  on  $22,000  therefore  is  $4,200. 
This  amount  is  used  as  a  credit  against  the  income  and  the  Income  Tax 
computed  in  the  ordinary  way. 


Problem  6:  If  a  corporation  operates  for  a  fractional  part  of  a 
year,  then  only  fractional  credits  or  exemptions  may  be  used. 

Thus  a  corporation  begins  business  April  1  with  an  Invested  Capi- 
tal of  $100,000. 

Invested  Capital  $100,000    8%  of  $100,000  $8,000 

Profit  9  months    21,000    Specific  Exemption  3,000 


3/4  of  11,000  - 


Total 


11,000 
$8,250 


3/4  of  20%  of  Inv. 
Over  20% 


Excess  Profits  Tax 
Income     Credit     Bal.  Tax 
Cap.  $15,000      8,250      6,750 
6,000         0      6,000 


$21,000 


8,250 


12,750 


Rate 
20% 
40% 


Income 
Less: 

Profits  Tax 
Exemption  (3/4) 


Income  Tax 

$21,000  Income  Tax-10% 

$3,750 
1,500  5,250 


15,750  Total  Tax 


Tax 

1,350 

2,400 

$3,750 


$1,575 


$5,325 


Note  that  only  3/4  of  the  Excess  Profit  Credit  is  subtracted  in 
computing  the  tax  (nine  months  over  12  months),  also  that  only  3/4 
of  the  $2,000  exemption  is  used  in  computing  the  Income  Tax.   In  the 
case  of  individual  income  taxes,  the  taxpayer's  status  the  last  day  of 
the  taxable  year  was  the  basis  for  determining  exemption,  and  if  a 
person  married  December  29  he  was  allowed  sxi   exemption  as  a  married 
person.   In  the  case  of  a  corporation,  the  time  it  operates,  and 
not  its  status  December  31,  determines  the  exemption. 


Problem  7:  A  corporation  with  a  fiscal  year  from  April  1,  1920, 

to  April  1,  1921,  would  compute  its  tax  as  follows: 
Invested  Capital  $200,000        Invested  Capital  $200,000 
Profit  -  1918  Act   60,500         Profit-1921  Act    60,000 

A  difference  in  profit  is  shown  above,  because  under  the  1918 
Act,  in  effect  for  1918,  1919  and  1920,  a  slightly  different 
profit  may  result  than  under  the  new  1921  Act  for  the  fiscal 
year  1920-1921.  For  a  corporation  reporting  on  a  fiscal  year 
basis,  it  is  necessary  to  compute  the  tax  under  the  1918  Act 
first  and  then  apply  against  it  that  fraction  which  represents 
the  number  of  months  in  1920  over  the  total  number  of  months. 

1918  Act. 
Fiscal  Year  Income  from  April  1,  1920  to  April  1,  1921. 

Invested  Capital  $200,000    8%  of  200,000      $16,000 
Profit  60,500    Specific  Exemption   3,000 


Excess  Profits  Credit    $19,000 


Excess  Profits  Tax 

Income  Credit    Bal.  Tax 

20%  of  Invested  Capital  $40,000  19,000     21,000 

Over  20%               20,500  0     20,500 


Rate   Tax 
20%  $  4,200 
40%    8,200 


60,500    19,000 


41 , 500 


Income 
Less : 

Profits  Tax 
Exemption 


Income  Tax 
$60,500    Income  Tax  at  10% 


$12,400 


4,610 


12,400 
2,000 


14,400 


Total  Tax  (1918  Act)    17,010. 
9/12  or  3/4  of  17,500  $12,757.50 


46,100 

1921  Act. 
Fiscal  Year  Income  from  April  1,  1920,  to  April  1,  1921. 

Excess  Profits  Tax 

^^^  ^  ^              Income  Credit    Bal.  Tax  Rate  Tax 

20%  of  Invested  Capital  $40,000  19,000    21,000  20%  4  200 

Over  20%                20,000  0    20,000  40%  8^000 


Income 
Less : 

Profits  Credit 


60,000    19,000    41,000 

Income  Tax 
$60,000    Tax  at  10% 
12,200 

Total  Tax  (1921  Act) 

$47,800    1/4  of  16,980  - 

Answer.  Tax  (Act  1918)  $12,757.50 

Tax  (Act  1921)    4,245.00 


$12,200 

4,780 

16,980 
$4,245 


$17,002.50 


Problem  7  (Continued) .  As  will  be  observed  by  the  reader,  the 
iS^n^^  computed  under  the  1918  Act  (used  in  1918,  1919  and 
1920)  and  then  3/4  of  the  answer  is  used  as  the  tax,-  the 
company  operating  in  1920  for  3/4  of  the  fiscal  year,  or 
9  months.  The  tax  is  then  recomputed  under  the  1921  Act, 
in  which  case  the  income  may  vary  slightly  because  of  the 
new  rules,  and  in  which  case  also  the  $2,000  exemption  is  not 
w!  in  obtaining  the  Income  Tax.  In  this  computation, 
iboi°  mv  ^^^2*^^  gives  the  tax  for  the  three  months  of 
x?  :  .  "®  **°  fractional  amounts  are  then  added,  giving 
the  total  t£ix  payable. 

For  a  fiscal  beginning  in  1921  and  ending  in  1922,  the 
*P  IS  first  computed,  as  above,  under  the  1921  Act,  and 
then  the  ratio  applied  against  the  answer,  based  on  the 
number  of  months  in  1921  to  the  whole  year.  The  tax  is 
then  recomputed  under  the  1921  Act  for  the  year  1922.  in 

**i^?oiw^®^®  ^^  ^°   Excess  Profits  Tax,  but  an  Income  Tax 
of  12^%.  A  ratio  based  on  the  number  of  months  of  the 
fiscal  year  falling  in  1922  is  used  against  the  tax  as 
first  obtained.  The  two  fractional  amounts  are  then  to- 
talled, giving  the  tax  for  the  fiscal  year  1921-1922. 

^^°''^*S:.^A««"'^^®^  *^®  ^^21  Act,  corporations  with  income  of 

»25,000  or  less  are  allowed  a  $2,000  exemption,  and  those 
with  income  in  excess  of  that  amount,  no  exemption.  For 
•oc  nL°  corporations  with  income  slightly  in  excess  of 
$25,000  the  tax  is  computed  (1)  with  the  exemption  and  then 
any  excess  of  income  above  $25,000  added  to  the  answer,  and 
(2)  without  the  exemption;  whichever  of  the  two  results  in 
the  lesser  amount  gives  the  tax  to  pay. 


Invested  Capital 
Income 


$75 , 000 
25,100 


S%   of  75,000 
Specific  Exemption 
Excess  Profits  Credit 


20%  of  Inv.  Cap. 
Over  20% 


Excess  Profits  Tax 
Income    Credit    Bal . 
$15,000     9,000    6,000 
10,100        0   10,100 


Teix  Rate 
20% 
40% 


25,100 


9,000   16,100 


$6,000 
3,000 

$9,000 


tax 
$1 , 200 
4,040 

$5,240 


Income 
Less: 

Profits  Tax   5,240 
Exemption    2,000 


Income  Tax 
With  Exemption 

$25,100    Income  Tax  10% 


7.240 


Total 

Excess  above  $25,000 


$17,860    Total  Tax 


1,786 

7,026 
100 

$7,126 


-90- 


Income 
Less : 
Profits  tax 


Income  Tax 
Without  Exemption. 


$25,100 

5,240 

$19,860 


Income  Tax  10% 
Plus  Profits  Tax 


$1,986 

5,240 

$7,226 


The  above  is  the  interpretation  placed  upon  the  relief  section 
of  the  New  Act  by  the  Internal  Revenue  Department,  Boston,  Mass.  A 
final  explanation  of  the  meaning  of  the  Relief  Claim  had  not  been 
made  from  Washing-^on  up  to  February  1,  1922. 


-91- 


LECTURE  11 

Preparation  of  Form  1120,  Corporation  Income  and  Excess 
Profits  Tax  Returns  -  For  1921 

The  following  is  the  Profit  and  Loss  Statement  of  the  Boston 
Furniture  Co.  for  the  year  1921  -  as  per  books. 

Sales 

Less  Cost  of  Goods  Sold: 

Inventories  -  Jan.  1,  1921 

Majiufacturing  Costs 

Total  Costs 

Less:  Inventories  Dec.  31,  ).921 

Gross  Profit  on  Sales 
Income  from  Liberty  Bonds 
Interest  on  State  Bonds 
Dividends  on  Lumber  Stock  Owned 
Total  Income 


Less  Expenses: 

Selling  Expense 

Office  Expenses 

Administrative  Expense 

Insurance,  etc. 

Officers '  salaries 

Repairs 

Notes  and  Bonds  Pay. 

Property 

State  Income  1920 

Federal  Income  1920 

Federal  Income  1921 

Bad  Debts  -  Actual 

Inventory  Reserve  Increase 

Depreciation  of  Machinery 

Depreciation  of  Building 

Obsolescence  of  Patents 

Sinking  Fund 

Donations 

Bond  Discount  Written  off 

Organization  Expense" 

Discount  on  Stock 

Commission  on  Stock 


$345,750 
1,456,100 

$2 , 151 , 800 

1 . 801 , 850 
395 . 480 

1 , 406 . 370 

745 . 430 
1,675 
4,000 
5,095 

$756,200 

Int .  on 
Tsixes  - 
Taxes  - 
Taxes  - 
Teixes  - 


II 


II 
II 


II 


II 


$65 , 630 

26.910 

7.090 

4,000 

125.000 

13,000 

38,000 

20 . 000 

30 , 000 

100,000 

60 , 000 

10 , 000 

4,500 

51 . 000 

5.000 

17,000 

50 , 000 

3,000 

5,000 

2,000 

5,000 

5.000 


Net  Profit  per  books 


647,130 
$109,070 


-92- 


Surplus  Account  Shows: 

Dividend  declared  Jan.  10,  payable  Jan.  25,  1921 
Dividend  payable  March  5 
Dividend  payable  Dec.  1 

Total  Withdrawals 

Balance  of  Book-Profit  Left  in  Surplus 

Total  Book-Profit  Accounted  for 


$18,300 

9,400 

60,000 

87,700 
21,370 

$109,070 


Balance  Sheets 
As  per  Book 


Assets 

Liabilities 

Jan. 1. '21 

Dec. 31. '21 

Jan. 1.1921 

Dec. 31. 1921 

Cash 

$45 , 500 

$71 . 650 

Bonds  Pay. 

$500 , 000 

$500,000 

Notes  Rec. 

10.000 

15.000 

Accts.  Pay. 

138 , 000 

84,270 

Accts.  Rec. 

170 , 500 

231.200 

Mort.  Pay. 

100 . 000 

100.000 

Invent . 

345.750 

395 . 480 

Notes  Pay. 

13 , 300 

13 . 650 

Lib.  Bonds 

40 . 000 

40 . 000 

Bldg.  Res. 

39,000 

44.000 

State  Bonds 

75 . 000 

75 . 000 

Mach.  Res. 

159.400 

210 , 400 

Stock  Owned 

100,000 

110.000 

Sink.  Fund 

100 . 000 

150 . 000 

Machinery 

510.000 

555 . 000 

Invent .  Res . 

28,000 

32.500 

Buildings 

250 , 000 

250 . 000 

Cap.  Stock  C 

425 , 000 

500,000 

Furniture 

10 

10 

Pref.  St.  -  1 

250 . 000 

200.000 

Patents 

170 . 000 

153.000 

Pref.  St.  -  2 

250 . 000 

250 . 000 

Good  WiU 

275 . 000 

275 . 000 

Surplus 

122 . 360 

143.730 

Def.  Chgs. 

500 

410 

Pd.-in  Surplus 

20 . 000 

20 , 000 

Stock  Disc. 

20 . 000 

15.000 

Donated  Surplus 

10 . 000 

10,000 

Stock  Com. 

15.000 

10.000 

Tax  Res. 

0 

60 , 000 

Bond  Dis. 

40 . 000 

35 . 000 

App.  Surplus 

42 . 200 

41 , 200 

Organ.  Exp. 

20 . 000 

18 . 000 

. 

Tr.  Stock 

10,000 

10 . 000 

Land 

100 . 000 

100 . 000 

$2,197,260  $2,359,750 


$2,197,260  $2,359,750 


The  company  incorporated  December,  1912,  paying  $280,000  in 
stock  -  par  value  -  for  Land  and  Buildings  and  $250,000  in  stock 
-  par  value  -  for  the  Good  Will,  as  the  plant  was  previously  owned 
by  an  active  manufacturing  partnership.   It  appeared  from  substan- 
tial facts  that  the  Buildings  were  worth  $200,000  and  Land  $100,000 
and  the  Good  Will  $275,000.   They  were  so  entered  on  the  books,  the 
excess  of  Building  value  over  par  value  of  the  stock  being  placed 
in  Paid-in  Surplus,  and  the  excess  of  Good  Will  over  stock  given 
therefore  carried  to  Surplus.  The  balance  of  the  stock  was  sold 
through  a  commission  brokerage  concern  as  follows:  balance  sold,- 
$395,000  par  value,-  sold  for  $350,000  in  cash,  after  which  the 
commission  brokerage  concern  deducted  a  commission  of  $55,000.  Ex- 
penses of  organization  amounted  to  $36,000.  The  Balance  Sheet 
shortly  after  incorporation  read  as  follows: 


-§3- 


Balance  Sheet  Dec.  1912. 


Assets 
Cash 

Organization  Expense 
Discount  on  Stock 
Commission  on  Stock 
Plant  &  Buildings 
Lsind 
Good  Will 


$259,000 

36,000 

45,000 

55,000 

200 , 000 

100,000 

275,000 

$970,000 


Liabilities 
Capital  Stock         $925,000 
Paid-in  Surplus  (Bldgs).  20,000 
Surplus  from  Good  Will    25,000 


$970,000 


It  appears  that  the  Buildings  were  appraised  March  1,  1913, 
and  because  of  changes  in  business  conditions,  their  market  value 
was  $250,000.  The  $50,000  increase  was  charged  to  Building 
Account  and  the  offset  credited  to  Surplus  from  Appreciation. 

A  review  of  the  books  shows  that  the  company  charged  off 
Organization  Expense  at  the  rate  of  $2,000  a  year  from  1913  to 

1920  inclusive,  leaving  a  balance  in  the  Account  of  $20,000 

on  Jan.  1,  1921.  The  Company  charged  off  $5,000  a  year  against 
the  Commission  on  Stock  Account  from  1913  to  1920,  inclusive 
reducing  it  from  $55,000  to  $15,000.  Beginning  December  31,  1916, 
it  charged  off  $5,000  per  year  of  the  Discount  on  Stock  Account, 
reducing  it  from  $45,000  to  $20,000  as  of  Jan.  1,  1921. 

Depreciation  is  at  the  rate  of  10%  per  annum  on  Machinery  on 
hand  at  the  beginning  of  any  one  year.  For  the  period  prior  to 

1921  the  Government  has  disallowed  $18,400  excessive  depreciation, 
which  has  not  been  restored  to  Surplus. 

An  analysis  of  the  Building  Reserve  Account  shows  that,  from 
1913  to  1920  depreciation  was  taken  as  follows:  1913  (10  months) 
$4,000,  1914  to  1920  inclusive  $5,000  a  year;  total  up  to  January  1, 
1921  -  $39,000.  Depreciation  was  taken  on  the  original  value, 
$200,000,  and  on  the  appreciated  value  of  $50,000  at  the  rate  of 
2%  per  year.   In  each  year  when  depreciation  was  taken  against  the 
building,  4/5  of  it  was  charged  against  the  Earned  Surplus  and 
1/5  against  the  Surplus  from  Appreciation.  For  the  present  year 
when  appreciation  of  $5,000  was  taken,  $4,000  was  charged  against 
the  Earned  Surplus,  and  $1,000  against  Surplus  from  Appreciation. 

An  analysis  of  the  Furniture  and  Fixtures  Account  shows 
that  furniture  was  purchased  in  January,  1915,  for  $10,000  and  that 
the  company  took  depreciation  of  $5,000  in  1915  against  the 
account  and  $4,990  additional  in  1916,  leaving  $10  in  the  account 
as  a  nominal  value.  An  analysis  of  the  facts  in  the  case  shows 
that  Furniture  and  Fixtures  should  have  been  depreciated  onlv 
$1,000  per  year. 


other  facts  of  importance  and  bearing  on  the  tax  are  as 
follows:   Patents  were  purchased  in  December  1920  for  $170,000 
in  cash  and  depreciation  of  1/10  of  the  value  has  been  charged 
directly  against  the  Patent  Account  for  the  year  1921.  Two  deduc- 
tions have  been  made  for  payments  of  Federal  Income  taxes,  one 
for  the  cash  pajnnents  made  during  1921  on  account  of  1920  income, 
the  second  for  payment  of  the  1921  Income  Tax  in  the  year  1922; 
this  latter  amount  has  been  placed  in  a  Tax  Reserve  Account. 

Deductions  have  also  been  made  for  Reserve  for  Sinking  Fund 
to  take  care  of  cancellation  of  the  Bonds  Payable  Account  at  a 
later  date,  while  an  additional  amount  has  been  set  aside  in 
Inventory  Reserve  for  possible  fluctuation  in  the  price  of  the 
inventories.  Donations  have  been  made  as  follows:  $500  to  the 
Y.  H.  C.  A.  and  Red  Cross  and  $2,000  in  similar  donations  to 
local  charitable  organizations.  Bond  Discount  Written  Off  is  the 
result  of  having  sold  $500,000  worth  of  Bonds  at  90%  in  1919,  the 
company  having  received  $450,000  in  cash,  and  having  already  charged 
off  $5,000  in  1919  and  1920  as  Bond  Discount.  A  similar  amount 
is  being  charged  for  this  year,  as  the  Bonds  will  nin  ten  years  from 
date  of  issue. 

Treasury  Stock  was  received  in  December  1920  as  a  gift,  the 
offsetting  entry  being  a  credit  to  Donated  Surplus.   During  the 
year  the  company  sold  on  April  1,  1921,  $75,000  worth  of  Capital 
Stock,  Common,  and  on  December  10th  retired  $50,000  worth  of  First 
Preferred  Stock. 

Stock  Owned  Account  represents  ownership  of  $100,000  worth 
of  stock  in  an  American  lumber  corporation;  $10,000  additional 
stock  of  this  concern  was  purchased  June  25th. 

Concerning  Liberty  Bond  interest,  it  appears  that  the  company 
owned  $30,000  worth  of  Second  4's  on  which  it  received  $1,200, 
and  $10,000  in  Fifth  4f' s  on  which  it  received  $475,  giving 
a  total  of  $40,000  in  Bonds  Owned  and  interest  received  to  the 
extent  of  $1,675. 

The  Manufacturing  Costs  Account  shows  that  the  amount  therein 
was  expended  as  follows:  For  Labor  $685,600,  Materials  $625,840, 
Supplies  $48,000,  Fuel  $49,100,  Overhead  and  other  costs  $47,560. 

The  Officers'  Salary  Account  shows  that  J.  Doe,  President, 
received  $50,000  for  1921  and  $40,000  for  the  three  years  prior 
thereto,  J.  Roe,  Treasurer,  the  same  compensation  for  the  four 
years  and  J.  Hoe,  Secretary  one-half  the  salary  of  the  others  for 
the  last  four  years. 

Form  1120  properly  written  from  the  foregoing  figures  appears 
as  follows: 


IP  RETUItN  IS  FOR 

CALENDAR  TEAR  1920 

FILE  IT  WITH  THE 

COtlECTOR  OF  INTERNAL 

REVENUE  FOR  TOUR 

DISTRia  ON  OR  BEFORE 

MARCH  IS.  ISZl 

IF  FOR  A  PERIOD  OTHER 

THAN  A  CALENDAR 

TEAR  THE  RETURN 

SHOULD  BE  FILED  ON  OR 

BEFORE  THE,  ISTH  DAT 

OF  THE  THIRD  MONTH 

FOLLOWn^  THE  CLOSE 

OF  SUCH  PERIOD 


Vb^  1  of  B«tum 

iiM-mrmD  states  internal  revenue  service 

corporahon  income  and  profhs  tax  return 

FOR  CALENDAR  YEAR  1921 


Or  for  p«riod  iMgun Jfcn.   X<,  19.21,  and  •nded. 


.„JDao,  H  l9J^i 


C«IU«t*val 


ii»r 

•■4  «■  til* 


(PRINT  PLAINLY  CORPORATION'S  NAME  AND  BUSINESS  ADDRESS) 

Boston  Parnitor*  CoDpany 
Washington  Streat,  lorth 
Boston,  Mass. 


CASH 


H.«L 


CEtT. 
•riMDi 


(M  NOT  WUn  M  TMt  »ACt> 

AditoJbjr 

nUST  PAYMETiT 
$                 .- 

Cashtor's  Stamp 


KIND  OF  BUSINESS.....fBLgnltnrflL.JUuMLfflLatiLrlng. 


IS  THIS  A  CONSOUDATED  RETURN  rJIS. 


SCHEDULE  Ar-TAXABLE  NET  INCOME. 


I.  OnMiMlM,lMiNtanisaadaIlow*DCM 
t.  Laa  coH  of  goods  mM,  oxclwivo  ot 
bdov  (from  SclMduk  At) 


CROSS  INCOME. 


itfin,  Mid  othor  items  cmllod  for  Mpsimtoly 


JEIQQ 


m 


h-Gnmiaeaum  from  opwstioM  o^thaa  tiwUM  or  mmrafftctoriiw.  km  alloiraaeM  (torn  SdMdnlo  A3) 

^yf *>>•  iP>tmt.oa  obligstk—  ol  tho  Unitad  «atM  sod  Ww  flmuK*  Oorpoatkn  Bomk  (from  Form  1125,  toe  Schedulo 


A4). 


S.  TkzsblofiMHHt  ftamaUoCteoooRM  (from  SclMdnlo  AS). 

%.  Rntih -^., 

T.  Ro>^ttm  > 


^  ^^<*'>>^*i><»^«rn>^l>y.P«»Ml'wvie*mrpor»tk»diifi]i|ritsM^ 

t.  OivklMMk  OQ  Mock  of  (a)  lof«%n  coipontiofM  (from  SchodnW  A9),  I ;  wd  (6)  domestic  corpomtions. 

SKcapt  psBBoosl  sarvk*  oocpoiBtioas  from  ssnii^  socumubtsd  on  sad  aftar  Jsauary  1, 1918, « ' 


Total. 


10.  GsHS  inoomo  from  sU  othsr 
IL  Tocjll  or  Itam  1  «o 


tM.Otihatjaad\ 
All) 


(not  inchtdiac  uqr  uwmat  ropoctod  in  Itsm  IS.  bslov)  (from  Schsdulo  AlO). 


7M 


4d0 


475 


096 


00 


00 


00 


DEDUCnOML 

tti  MportMl  ia  IlHt  t  abovs  or  caOsd  for  sqpuatalx  bskw)  (ftam  Schadnls 


IS.  flmapMi— tinn  nt  iMrmm  (JwuAnAh^  .^l^gLfi 

M.  Bai«if»(iiifcliidia(  labor,  sappttoa,  sic.)  (ftam  Sc^sdvk  A14) 

Uk  Ialmt(sssp^SolIartractioii%p«Hn|>b9) 

U.  Tnmifnm  SchsdolsAll) : ^ 

ir.  D«b«ia«»«aiiwl«ob«imrtU«Baodchaifsd«C«itkiBttetaxabtopsriod(taM8ch«latoAin 

IS.  Tibathm,  wmr  and  tsar  (ladadlac  obwlsscsm^)  (from  Scbsdnto  AH) '. 

IS.  Pagkliim  (iwm  Schsdoto  Alt) , 

9l  Total  o»  Itbxs  U  to  '•  . 


iaiiAatmw  form  paid)  (from  SdMdulsAlS) 


102 
.42 


.6.0 


..X.Q 


6Ja£L 
000 


00 


000  1 00 

-0-QQ.lD.Q] 

.QQ0J.Q.Q 

J?.QftlQa 

L.a 


BBTwam  I 
of  capital 


11AMDS9. 


*r- 


. Md  miKsllaiMouB  invsstments,  iodiidiag  Uqoidatinc  dividendsCfrom  Scbodule  A22).  I. 

dttnag  tbo  tazabis  psrjbd  aad  boC  compeomted  for  hy  insmaiica  or  o&nnso.    (nam  Schsdols  A2S.) 


(BK«swltolastcofauBasamo(ordillsrsao«  bsCirs«i  ItonMnaadB) 


-fi. 


M.  Nstiii(»m«lortaxaMspsriod«zchiaiv«ofd«dtkctk>iisfordivid«fKksiidamortasatkm(sumofordi^^ 
WL  Dividnds  oa  stock  of(«)  ionifB  corporatioas  taxabU  by  tbo  United  States  oa  tbsir  net  incomss,  and  (b) 
pwatioa^sacspipsmbiialsmvfca  corporations  from  eandngiacaimiilstedoa  and  after  January  1, 1911.. 


of  or  difference  between  Items  21  and  23,  tbe  lattsr  as  eztsnded). 
* ' cor- 


096 


ol«iriMililias(lrom8cbadaUA»)(sKteadtotalo(IISM»and») 

Mar  laooMB  loaTAxaMB  Phhod  (difimaM*  bstwosa  Itsma  M  and  98.  tbe  latter  as  extended-4o  be  enttred  as  Item  5,  Scbedule  D). 

Lamdsdaetiaa  pwvUodialka  imt  paiHnpk  of  Seetioa  SS,  ICsrtAant  Marine  Act  of  l»20(see  page  1  of  Instructions,  paragnph  4) 

Wi*  Jneeasa  ol  a  earpsftfoa  ssrafan  sMps  ennged  in  fareltn  trade  (Msonnt  to  be  osed  only  in  computing  profits  to»  in  Schedule  D) 


OQ. 


4.ia 


^■aaaBBHt    -Ja3Kafc» 


337 


327 


000 


6.50 


a7?roQ 


Z33I 


09§. 


875 


00 


esL 


m 


.Q(L 


OfiL 


SCHEDULE  B-INVESTED  CAPITAL. 


I.  Qipita1.siaplBs^andandhrMedpwflmatbetinnfa^of«ajmbUpsrfadsashoaabybook»(lwmSAsdiito^          11). 
S.Plasa4iiistsMniBbyaajflfadditiaM(tea8chediikP,I«M4)_— ^ ■. 

4.I^*ITnrfii hy^^ynlAJiiSi— fh«>aA>i.Un,  TS^t)  

Sb  RaMAonHB  ~— ——___«— ______________«««_____«__«_______..__ 

S.  PiMcrminoscfaaaBSS  in  tniMtad  capital  doriactanblopmlod  (Wet  Twcwmw  or  PsctSMSIrom  Scbedule  H) 

T.  Torsi  (oa  n»M*nm— )  

8.  LsmdedaetkmooaoooantefinadmMbMamsm(from8chedaleJ) 


>.  InTirtsdcapitalfartaabla  period.   (li  retain  is  loc  a  period  Ism  thas  a  ftiM  year,  sse  page  2  of  iMtractions.  paragtapb  11) 


Amovmt. 


k-lj5.73 
63 


19.§. 
78 


IE 

iot; 

TJ9T 


360 
396" 


QSL 


750 


00 
5C 


OQ.. 


OUQ_(iCL 

.;.3. 

87- 


650 

7iy 


SCHEDULE  C-EXCESS  PROFITS  CREDIT. 


5.4_ 
53" 


l.Bi|bt  per  coat  of  inTostodcaptel  lor  tnnbia  period  (Item  9  of  8cbsdateB).___ 

t.  BInavtimi  (18,000)  (ssospt  lor  forsicn  corponrtiMa) '. 

8.E»semProfts(beditatemlplaiItsmD.    (IfrstBmistorapsriodlemtbanafoUymr.seepaKeSof  Inetnictione.  pamumphll). 


31. 


.3. 


977_Sll. 

QQQ..^ 


SCHEDULE  D-COMPUTATION  OF  TAXES. 


1.  Hs8inoeaBe.noCin 

2.  Balance  of  net 


of  80^  of  invested  c^itaL 


8.  TMals  computed  under  Section  801(b) 
4.  Ezcem  Profits  Ttt,  if  OMBpntsd 


1.  Aaoonos  N  rr  IMOMB  (Inifs 


£12. 


10.7. 


SL42. 


32<SLJei9. 


numz'STr.mxiz 


21_i 


CSBBR  (hXlf 
C). 


_ao. 


i[5: 


R77JM_ 
.0.. 


g773g 


io-Taz. 


'66  63 
.238.  .g9 


^97 


J!L 


t. 

lUlS. 


20% 


808,  8(M(c)  or  837  of  tbe  Revenoe  Act  of  1918  (see  pegs  2  of  Instnictions.  paragrtph  14)  ^ 


8.  Net  iacoase  for  tanUe  period  (Item  87,  Sebednle  A) 

S.  Um:-Tu»^ii  tHtmrntcm  obMnHaet st  1 1 1 T 


UsttMl  MMMi^  War  FtaMnCor. 
■  qt— \Bch>diU*  A).. 


ponilaa 
7.  BsMMproSta  tas'(l^ 

S,a;bMlal«  D)«r 

•.  Bifiwi  prolta  wd  war 

(iMa  le.  Pona  lUW, 


OoT— — *  eMtractt) -    -. 
^  Eic«pUaaa,«Mptiorltni|B  canons 
Uoofl.  t3,a0»  nba  ratvra  to  lorlMi 


tban  a  yaar  Aa*  pac*3«(lHtrBrtlnB, 


.fifi 


ilZ& 


18&JI& 


Inl  X9giL    „ 


QQ. 


00 


10.  Balance  salqect  to  income  tax  (Item  &.l«mItems«.77siiT 
9.  or  Item  6.  lem  Items  8, 8.  and  9) „.l.  j 


3^7  875 


69 


258 


.801 


00 


05 


073  95 


AMENDED  RETURNS. 

.^n  amended  rotura  must  be  plainly  marked  "  Aamnded ' 


thefaceofthorHaia. 


11.  Tu  of  10%  on  Item  10 

12.  Total  tax  (Item  8, 4,  or  8  plus  Item  11). 
u. 


!«. 


jd  pnata  taxM  paid  t« 
(enlSB  rooBtriM  or  paMiMiaa*  of  tha 
UaitadSteUa.  (flaaaacUoasasaad 
S«(c)  a(  K*rmm  Act  of  MU) 


tax  withlMld  at  tha  towea  te 
ttm  af  a  foraini  oanontthm  not  as- 
ltiS«d  ie  a  trada  or  tnHswi  wfUda 
tba  Ualud  Statai,  aed  aot  harli«  any 
-^ odNOtaMttawaia..... 


15.  Balance  of  tax  (Item  12  minus  Items  13  and  14) . 


d.  Amookt  ov  Tax. 


.S£. 


.4.8. 


Za2L13_ 
affi&.9.8- 


25 


33: 


807   40 


94_&5.^|4&.. 


iL 


CHECKS  AND  DRAFTS. 
CWAs  and  dmite  will  be  accepted  only  if  payable  at  par  at  your  Collector's  oftee. 


Pace  ft  of  Betnm 


liT-CAnTAL.  SURPtUS.  AND  UNIMVIDCO  PROFITS  AS  SHOWN  BY 
HTORC  ANY  ADJUSTMENTS  ARE  MADE  THEREIN. 


■4.  Staek  MtittDj  outsUndlng  »t  t!)*  end  or tlM  pr«c«din«  UnUa  p«M  tbauM  IwaalMd  in  thb ■eteM* 
•ifta*«it«ttk«titUp«idup.  I(st(<ckorthar«w««iss<Maftt»aHBiMliraliM«rwtU>wtptr*ahMUM«aMa 
*nU  nflKt  Um  utounU  on  th«  books  In  nitpact  thanof  ;il  tb«  eUis*  of  Uw  pnotdinc  Uaabi*  p«tod. 

BO.  This  Itamtkould  tnciudo paid-in  surplus  OS  iiboaro  tjr  books  It  thooad  of  tbopncadtng  tezmlil*  portsd. 
lliBywii>iinriiBlrtm«(lMrtwBwtti«3a»(»)(?)ottl»oR>v>mMActo(m»oruod»Artfcl>«WotR«KulllnM 
l^thoMDonnf  riiteid  ihiwM  l»in«w«attwlif  Itea  i,  Schadulo  F.  and  not  In  thhidwdnlfc. 

B7.  "■  -II  -M-*-  rnrnnl  iJirtnllTiii  tT mqitiM  Ml  t w i  r"  nrmmiitrifl  ttinnii|>  (kAmtkim  — ii 
tewpotttB»tineow»MW>wBidt«pw«1— y>f>w>ay.lfp>opwty«plato*J.b>ilMiaMH—T.  Sodi 
WWthouldboldilMliiMiMBMi— |iiBiinllid»nht»l.ino»«b>rtttiirrw. 

Bia  IttteoorponttaatadMlMadMMirtlB*4iiflii|tthaU>aU*p«ladaB7toMni7itBek.Mpl««(th« 
IwwMl  miIiIm  nil  I  w  Iih  till  iiiiiiinl  1 1  iiiin  i  1 1  |iii  wiliiii  tiiil  ini  iii)»w|iiiiii  iiUlMfiiiliiml  j  lii  rmrtiliid. 
TuMutiiHnt  lKliiil««n«locfcriicstiiwdbytboc*»yw»lla«Md»«tci«cri«d.iipwW«ioCtUwMB«l»rtl» 


Item. 


■ikiiir 


ftyltil  lluli  iwld  iip—d  nctunnyoutslindtmat  thot  lo»oof  thopwrodiat  ytar 
L 
t. 

a. 


<u. 26.QQQ0..0Q 

850.0.Qa.Qa 


TOTAt 


sad  ladiridod  pnRtK 
Plid-lat 


H 
Ml 
11. 


EaraadanrplMHidnBdivldcdpraflti 

Bawnrw.  additlam  to  whirh  v«  not  doducUhto  is  cwnitlm  Mt 
(tOborMOMiMlNthtalUiCMkMtiMM) 


Otbcn  lt«M  (!•  te  «MDid) 

TorAiorlTnra«.s,*,7,A]iv> 

«■  meetmit  tt  tiinwiiy  stock- 


Cipltnlwid  wrplns  at  hwtnntnt  of  t»«»bl»  parted  m  Atmn  by  fcooitt 


.9JE^5QQ0^0a 


lOQQQJX). 


3CHCOUU  P.K-ADIUSTMCIfTS  BY  WAY  OF  ADOmONB. 

n.  V  u  addltUm  to  Invcstad  capital  U  cUlsied  In  tttm  I,  Bdiadula  T,  nitailt  «  i 
(a)  tba  kind  of  property,  (»)  tha  yaar  tn  which  it  was  paid  In,  (r)  tnm  wbon  acquirad,  tsplainlaf  hliralihaa 
Alp  to  tba  oorpsratloo,  (4)  tba  actoalcasb  vakia  o(  surb  proparty  at  tha  data  wbM  paid  la,  (O  tba  par  vslnaaC 
•tack  or  sbana  lauad  tbwafor  and  tba  aaMont  at  which  such  property  waa  «itarad  in  tba MBMBla,  (/)  tba  bailt 
upon  which  tba  actual  cash  valna  ot  tba  property  was  datamiaad  and  tba  data  whan  tudh  daterwlnatlna  wm 
iaade,aad(f)  the  amount  ofdapraeiatkaniitaimdaiUDdt  proparty  »«■  tba  data  oCac^Jittloa  to  tha  haglwlin 
altbatasafcia  period. 

n.  U  aa  addition  to  tuTastad  capital  ta  datanwl  In  Item  1,  a*a«rfa  F,  ankBtt  a  itiliwt  abowtaf 
(a)  tba  kind  o(  property ,  (6)  the  year  in  which  It  waa  acquired,  (e)  lU  eaat,  (d)  tba  aaMoat  a(  dipraaiattai  aoa- 
k  property  from  the  date  of  acqoiiltiaa  to  the  beciiiiii&(  of  tha  tanblapatod.   lata  aim  wbaHi» 
titamaeoiht  to  bareatored  was  actually  naaJar  amble  at  tba  hetinnlic  of  tba  tanbia  parted.   Warathan 

a«paadltuwa,  when  made,  written  off  in  lien  oldipwriatleB? , ..   Uae,«iplaiB«hatadiai*mm«i 

hara  ban  made  to  provida  for  depredation  in  Ttaaraf  tha  patpomdraatoratkntaiBptai.  AddtttanilitMi 
I  ara  camulatlve  to  tba  beclnnlnc  of  the  tasaMa  parted.   Par  all  addlttaaa  Iwiwiiiilat  proflili  wait  ba 
(fcrJaprariattew  ta  tba  baflnntof  of  tba  taiabte  period. 

n.  U  any  additlao  to  laraatad  oapttal  te  ciaimad  la  Item  I.  SdMdola  P,  itila  vaattetBy  tha  iMial  <C 

t  written  ofTsach  year  in  tba  baohaaf  tha  compMyaad  tha  amenat  alio  wad  aaadadaoWwntaoa^ 

Additions  to  this  Itam  ara  oomnlattTa  ta  tba  badaalac  of  tha  I 


ItaoL 


.\ctaal  caidi  Talna  of  taanMa  proparty  clearly  aai  I 
parTalBaofataAlsaredtbtralurorofthai —  ' 
Iberelsr  ( ArtlclM  (M  and  S7). 


{.  AddltloM  to  wrrUa  ( Aittelm  S«  to  M3).Q]!S-*— ^29-«AltfiL*.. 

S.  Dcprtewtlen  or  depkuon  charred  la  tha  aerouats  of  th*Mrparallaa  but 

dualtewadbytbaDopaitentaaadcdaetloaoalMaaatasntarat 


Total 


3^3.0.J)Q. 


M4.0Q.P.Q. 


1 — 


7539insr 


BCHBDUU  C-ADIUSTMBNTB  BY  WAY  OF  DCDUCTIONS. 


Ol.  Ii  lay  pataat,  eopyrtght.  aaerst  primal  or  tMBoH  faod  win,  tiadamar*,  tiada  tfHifcftiMhlw^  ar 

othar  ilarilar  lataafibte  pn^perty,  paid  In  for  stock,  carried  as  as  amet  by  tha  earparaUoBr^_«.tt8 If 

not  ant«od  specUlcaUy  as  tneh,  is  tha  »"»«'«|jbu  vatna  marfad  mdar  aay  othtf  title  or  tltlm  oa  tba  books  or 

babaeasbaaUsabnitted  with  tblaMtafnr  JUL laltMtsndantbabooksat  aTahwlaaimmedts 

aetimliSBbTaloawbaBpaldlnr  .AQ laexcemofthaparTaloaofthaatocilssaadtheralarT  .X6A.^ 

Is '.be  Sfpint*  of  such  asBsts  aeqabod  prior  to  March  s.  mr,  eolaii^  on  the  books  at  a  Tthia  la  aamm  of  31  par 

aaato(tbaporTalnaottbaslodcoatataBdinconlCaaghS,m7r_AAA btbaavicateefi 

aaUrad  on  tha  books  at  a  Tahm  la  omm  ol »  par  •«!  «f  tha  par  valot  of  tba  stodc  oatrtaadliv  at  tba  1 
aCtbataabteportodr .IflLB — 

Uthaanswartaaayo(thalanfslBC«MtioHte'<yH,"«ibaUastalaaanttfio«la(KparaWy«lthni9set 
ta  aoeh  assets  aeqoind  O)  bakra  MatA  S,  lti7,  and  (2)  on  or  altar  that  data,  (a)  date  of  aeqnWtisn;  (I)  oa* 
TahM  at  that  data,  with  a  rnmplsti  esphmatlna  of  tha  basis  svea  which  inch  cash  ^alsa  was  dstenalasd; 
It)  par  TBtaa  of  thastac*laaotd  tharafar:  (tf)  par  vatas  of  total  stock  ontstandli^  March  «,  mi;  (r)  par  tiIbb 
af  total  sto(^  ootstaadlBC  at  the  badaaiac  of  tha  tuaUa  parted;  (^  tha  Ttha  at  which  BDdl  Mssis  an  snlaai 
an  tba  books  of  tha  corpcratign. 

U  aU  the  latancibtes  wm  acquired  batora  March  a,  I«t7,  tba  amsoBt  by  which  (/)  aaeasds  (»),(«),»  par 
eantof(0,«r2Sparccatot(«),whlcheTarutew«st,anistboanleradasn(mI,8chedulaO,k)rtbatazabtopsrted. 

If  tba  tntaactbles  were  acquired  on  or  alter  If  ardi  S,  IM7,  tha  amooat  by  whlA  the  entry  la  (/)  miatlnc  ta 
aoeh  Intangibles  exceeds  (»)  or  (r)  rdatlat  thsrrto,  or  ZSpar  eant  of  (O.  whkhOTsr  to  lowest,  most  balackidad 
hi  Item  1,  Scbeduto  O,  Icr  the  taxabto  period:  iViriM,  nat  Uiata^btas  were  aoqolrad  bataa  March  S,  w;, 
and  abe  an  or  after  that  data,  dadoetlan  ibaU  ba  made  aa  that  tha  assaaat  iaekided  la  laeosiad  capital  Isr  tha 
aaimataoflatanclTilMihallne>sicmdWparcsntafthan>in> 
at  tha  tasaMa  parted. 


l«oiB.-»  tha  stack  of  tha  earporatlen  was  lasnad  at  a  asalaal  enhm  or  wtthont  par  eahM,  Br  tha  I 
af  tha  cempotatka  mdar  Item  1,  tba  par  vakw  shall  ba  deaaasd  to  bo  tha  tatr  market  vataa  M  of  tha  data  or  datas 
aflmoa.  Tha  agpa^tavataa  so  datersBtaMd  of  stock  ontstaaMacea  March  S,l«17,  oral  thai 
tasaMa  petted,  than  hatha  baste  lor  tha  eampntat  tea. 


ot.  Is  say  lantfMe  property,  paid  la  Br  stock. 


'irtir"^ 


Use.  te  tt  «tmd  on  the  books  at  a  TShia  la 
•asam  a(  tha  par  Taloa  of  tha  stock  paid  tharsBrt 

II  tha  aas^sr  to  stthar  ot  tha  Isat  two  qnsitteM  is  "ysig'' SBbarit  a 
(»)  whsa  aoqoirad,  (c)  par  TahM  of  the  stock  paid  thsrste,  (d)  aetoal 


M  IB  MM*  BX  tM  OOVporattOB? 


SJOL 


Mat  shswli«  (a)  ktatd  of  prapatty, 
Tshw  at  the  property  whan  paid  ia, 
(r)  tba  baste  on  whlA  that  Tataa  was  dolemlnsd,  (0  valDS  at  which  tha  proparty  Is  antarad  ea  tha  eorparatlan's 
haoks,  and  (I)  amoont  by  whli^  audh  TshM  oaesads  tha  aOewaMa  ealaa  aider  Saottea  mca)  0)  «( tha  Baeanna 
Actafins.   Enter  thtoamoont  as  Itaa  3,  adMdoloO,  Br  tha  taiabte  ported. 


OS.  Wmtha  biahiam  lejaeorporatad,  roerisidsod,  or 
aobaaca  la  owaarshlpot  property  after  March  S,ltl7T  ^ 


«  waslto«wasidripehaB(sd  or  waathara 
~  If  so,  answer  tha  BB  i  all  (himWiii 

(•)  ^-'--■-*— *-'"'j- ' '-*^-*— TVTirirT'ii*hi|irnintj  rtilrh  rhsatod iiwaonMi rsmain 

la  the  control  of  tba  mmo  peraops,  cerparatlana,  omof  lotlias,  ar  partnenhipe,  or  of  any  of  thamT  ..JSyji— _ 

(>)  Ware  any  of  tha  aaaato  enterad  on  tha  boohs  o<  tha  eorpontloa  isaktac  thto  rstom  ct  a  hifbar  vahw  thaia 
aa  tha  books  of  Its  pradeeassor7  _:r:=>___ 

(e)  II  soch  proTteos  owBsr  was  act  a  ooipantioa,  attadh  a  otataaamt  *owii«  (1)  the  cost  of  aeqnMtioa  to 


thaprevioaaownorafaByaosotsotraBSfBn«derroeahrad,0)asp«dttnrmonbaeqaenttoth*tdatafarbettenMnt 
or  deratopaaHit  not  dedoetod  as  oxpanm  or  otbsrwlsaBaea  March  1,  IMS,  by  axh  prerioua  owBV,  (3)  thaaltow. 
aea  lor  dapradation,  depletkm,  or  Impalnacnt  slace  tba  data  of  acqatettien  by  such  prerioua  owner. 

(O  If  all,  or  substantially  all,  of  tbo  property  wae  aeqolnd  taaa  a  osrporatiea  dnriaf  tha  tasaMa  parfod, 

«**«^'>— «"*^'»"'"*"*'"*«~'»'l"< "1  ""  '■— **'^*-t'"'''^"f**^*ttMtirfTMairiMattlia 

^t»i».«^i.t^l»i.»»/.n.^t>....«^»ftiM.|»iy»*Yt..tv».i.|     IT     .^t^^tt^^ — . 'Til  slrn  a  balsnna 

shsat  or  statement  of  tha  corporation  maklaf  thto  rstoB  Aaorlai  tha  vahM  at  1 
or  traaslarfad  were  antacod  on  the  books. 


Vbr  tha  pnrpoM  of  dotermlafaic  iaeastad  cafMaleaA  aaa 
than  vanid  haea  bean  allowed  to  tha  prerioos  awBV,  U  a 
iswh  ptavlana  awnar,  wtth  prapor  adtoatmarts  Bt  taaaiMti 


i|M«l 


ahaO  set  ba  aDovad  a 
or,llaela 


Ui( 


Ot.  b  any  praparty  (ImBKHin  phyateal  property,  aocurlUas.  and  lntan(lbte  property)  paid  fcr  with  ea* 
or  with  othar  tucibte  proparty  antmd  on  the  books  ot  tha  estporatioo  at  a  rahja  Inu^  of  the  amoont  of  caA 

paid  thiisfcr  ar  tha  actnal  cmh  Tahm  of  tha  tai^ia  pwiporty  peid  thwefcyT ...  JLU Ifw.nbmlta 

statanwat^aali^  (a)  Mai  at  property,  (ft)ameaBtotcaahpald  therefor,  (c)  actual  cash  tsIuo  of  other  tangiblo 
pceparty  pnU  thaasBr,  (d)  haw  that  Tshia  was  dstsflai  rt,  (r)  rahie  at  which  the  property  is  entered  on  tha 
books  of  the  corporatten,  and  (/)•«*•*  of  «)  over  (»)  or  (c).  ThUexcmmiKtbaentcredatltemf.ScfaedutoO, 
BrthetviabteprTted. 

GA.HW  adaqnato  iiiiihiBa  haaa  aaal^tn  tha  aoooonts  of  the  compel'  fcr  (s)  losses  of  aeatr 

Uadr   Yftg   (»)  depreciathnT  _..Iflfl„....  (c)  ob«)leaccncer XAB ,  (i)  depMten  af 

niaml  deposits,  timber  sopvllr*,  and  tbr ItkoT  ..^^ 

n  rlriin**  charts  hm  not  betn  made  for  deprodaUon,  depletion,  obsolssesnoe,  and  othar  loases,  and  (ha 
TShss  ot  tha  prsparty  hss  not  been  maiotaJDed  by  replaoemenU  that  haifa  baaa  charfsd  to  expense,  proper 
addittenal  Amim  thanfcr  asut  bo  computed  for  aU  years  in  which  thsj  VMS  ast  BBda  oa  the  books,  and  tha 
total  sms— tat snA  cihmiss  mnir  haaBamd  aa  Item  fc  Mehsdate  O.  ^ 

OC  Did  thaoarporatlen  aeer  rseoiva  a  stock  dirldoad  on  ttoA  ownad  In  aaothor  oorporaUonT  ..  JLw... 
If  tha  aoawer  U  "ysa,"  state  in  detaU  for  each  stock  dividend  rMseived,  (e)  data  leooired,  (6)  from  whom 
NSiivod,  (c)  number  of  shsies  rsceiTtd,  (O  por  rahie  of  shares  reoelTOd,  (r)  Tshia  at  which  entered  on  its 
hookscfaoooust,(/)  whether  or  not  surphis  was  increased  by  this  tsIuol  Ifanswer  is  "yea,"  enter  tbaamonat 
by  which  surphis  was  lacraaaad  ••  Item  6,  Schedule  Q.  U  answerls"no,''ststathe  aoooant  in  whkdilt  was 
todndsd,  (f)  data  of  sate  at  aay  of  tba  shares  of  stock  rscolTed  as  a  stock  dtridaid,  (t)  anabar  of  ahaias  sou, 
(0  aammt  reeolTed  tberolar. 

NOTX.— If  answers  to  the  tore(o<n(  questioas  Indicate  that  stock  dlvldaods  reoelyed  at  any  time  hSTo  beaa 
treated  m  an  Incrsasa  of  surplus,  and  surh  increase  Is  raflacted  in  the  oomputaUcn  of  InTested  capital  ia 
nturna  for  aay  or  an  of  the  taxable  periods  1»I7, 1918,  aad  1919,  assonded  ratuias  should  ba  filed  for  soeh  taa> 
abh  ported  or  pertods  In  which  this  error  occurred. 


Itam. 


I.  Valuation  of  patents,  copvTirbts,  Sf>cret  prorcaarx.  or  (ormnte,  rood  will, 
trade-marks,  trade  Brmods,  fraorhises.  or  other  lntaia(ible  propnty 

1  Vataattoa  of  taadbto  property  paid  in  lor  stock k. 

S.  Vahmttea  of  ssssta  arqolrod  la  reorcanlratinrw .,—» 

«.  Aivmclattoa_3.tL0.Qk_  J 

Iw  PopwlaHsn,  <^iatfaa,  aad  othw  losses : 

CMsckdiTMsaaaaslsokheldlnaaotbrrcorpacatlen 

t; TtwAt  Panmiwa-.— .———»...-.— ■—.-..— 


43760.00 


JSiQQQQM 


.6S.7.5.0.a.O.O 


aCHCDULB  H.-CHANCES  IN  INVESTED  CAPITAL  DURING  TAXABLE  PERIOD. 
1.  Chanpa  in  laimted  safltal  dadnf  the  taxaUe  period  ordiaaifly  srlm  la  oaTor  more  of  tba  fcOowlac 


<S)  By  aaW  of  capital  stodclbrcadt  or  by  the  tsroa  of  capital  stock  tar  tanflbte  or  other  assstf. 

(•)  Dy  paysBsat  of  aaacosmenta  by  stockholders  or  by  cteaUoa  of  pald4n  aoipais  by  oontrtbgtian  at 


<r)  By  Hqiddatka  ot  part  of  tha  capital  by  rettesaiaat  of  Stock  or  by 

antofeonantoanilwff 
(I)  By  payment  of  eashdlTidonds  out  ofaanlaci  of  prior  yoais. 
(t)  By  paymsat  of  FadarallaconM  aad  profits  tasas  for  prartonsyaank 

ThaahsacM  with  rsspset  to  tans  wiUoecor  in  BssrlyaTary  esse.  Should  aoohaacmbaaoto^  thai 
BcthsnmliUnB  should  bastatsd. 

S.  Tha  knowing  inatraettens  abeoid  ba  MIowad  la  maktag  the  abore  adjustments;  each  item  should  ha 
doalCBatad  M  an  addltloB  or  dodnetlon,  deduetioa  being  designated  by  red  Ink: 

(a)  U  stock  to  laoned  (or  c«d^  tba  actual  CMh  raootead  (but  not  tha  amount  of  diaooont)  should  ba  antand 
tothteaohadola.  AsssU(othsr  than  omb)  paid  ia  for  stock  most  bo  vahiad  in  acoardanoa  with  8eettanSae(a)  (I) 
St  tha  Banranna  Act  of  IML 

(e)  If  capital  stock  ot  tha  eorpormtion  to  reaequlrod  bat  not  paid  lor  out  of  oatrent  profits,  tha  ooak  otaMll 
stsek  *oaM  ba  dsdoetad  fnm  InTsstod  capital. 

(d)  Boport  dleidonds  paid  out  of  profito  at  prter  years  but  not  dlTldands  paid  cot  of  profita  of  tha  taiahla 
pariod.-  Aay  distrlbntten  made  during  the  Out  todays  of  tba  tasaMa  penod  shall  badaasnadta  hare  hamimada 
Baaa  aaniap  or  profito  aceumolatod  diviag  the prooodlag  taiaMe  ported;  but  any  dlstribotiaa  mada  dntlag  tto 
lacHlndor  af  tha  tasaMa  pariod  abaU  U  daessod  to  hare  been  made  froin  the  profita  kr  that  period  to  thaaztsnl 
OmtaiohprofitaHasaffieient.  (See  Articles  117  and  UW.Regulatiaos  45.) 

(«)  na  amannt  of  Ibdarallaeoaia  and  ptotita  taxes  payabto  should  bo  prorated  and  dodnctcd  as  «f  tha 
4alaswhsH  das  sad  payaMa  whether  fesarreabayabaea  sat  op  on  tbo  books  or  not.   (SfeArtictoML) 

ThaarsragaadlostaddMtaetipato  ba  ootowdlnoohmn7aqnalstotallncoMaandpro<Us  taxnaWplted 

•ulha 


4.  In 
•.The 

ttha 


tor  in  edamas  1  to  A  should  ba  glran  tot  aO  traaianhnns,  exeopt  that  cofaanas  t  and 
to  tha  issDS  or  rsacqolstUan  of  tha  corporation's  stock. 
>  sntsr  tba  aombor  of  days  remaining  I  n  t  he  taxabto  pwtod  Qnohsd lag  the  data  of  diaagt). 
act  roportod  in  Schednie  L,  if  not  in  aocordsnoe  with  tba  inoraasm  or  < 
ahaaU,  abenld  U  fully  raoaodted  tborswith. 


L  Kstaraofaddlttaas 
aaddadaotloasL 

dL. 

S.  Number 
ofiharM 
sold  or  re- 
aeqidrsd. 

4.  If  lor 

caah.fltata 

price  per 

ohare. 

S.  Amount  of  cadi 
orcaahTahia 

or  paid  out. 

Number 

of  days 

aOechva. 

7.Adla*tadanraca. 

/Ori»oSXCMMat\ 

fiomaatoQk 

^ 

750 

U.00e 

1.76000  a 

-£16_ 

r66606  a8& 

?  . 

- 

4.x      .  ., 

i:M 

^OOBM    taj 

100000,  ' 

-42860.27 

f              1,     , 

1/8J 

jjaaoae^. 

iDiTidftnd 

a_ 

L 

SAIL. 

^UQlLJll 

t.         Nat  iMcaSAsa  ea  DacnBASB      _ 

.-r^MM^.-Xl 

aCHEOUUE  J.— INADMISSIBLE  ASSETS. 


Haa  tha  eorpontloa  any  Inadmtaribte  aaseU  (L  a.,  stocks,  bo^  and  othar  oblifslkaB, 

of  the  United  Btatoa,  tbo  income  from  which  u  not  taxabto)T ksM. 

U  M,  atlaefc  barato  a  statemant  showing  fcr  tha  taxsMa  period  the  facte  caOad  hr  In 


(■}to(A«faii 

If  tba  tacessa  tnm  sooh  aassta  oonslsta  in  part  of  gala  or  profit  from  tha  aate  or  othar  dlspositton  thorseC  ar 
IfallorpartofthetotereotdsriTedftomsnehassstotelnofloctlwchidodlatheiMtlnenmabecaueeofthellmitatloa 
on  tbo  dodnsttea  of  Interest  ondar  Section  23t<a)  (3)  at  tba  Roeanue  Act  of  1918,  then  a  oorrespandlng  part  «f 
tbaoc^pllal  Ini  tod  In  such  aoaets  to  deemed  an  admlalWa  aassL  In  such  com  sat  fcrth  In  detail— 

(a)  tha  various  kinds  of  income  derived  from  such  asseta  and  tba  oaaqmtatlfln  of  the  part  of  tha  esfftal 
laeastod  therein  whldk  to  deemed  an  admlsaibto  asset. 

Tor  tbo  porpoM  of  thto  schedote  Inadmi^stbte  aasata  shsll  ba  Tsfaied  at  cost  of  aoqnisltian,  except  that  If  tha 
aarparationtoadealor  insecurities  and  InrentorlassucbsssetslB  accordance  with  Artlcte  IMS.  RecultloM45.sndi 
toesalary  figusashsll  noBsWiito  ths  msasure  olTslua.  AdaiisrfbteassotaohallbaTalaad  as  provided  In  Seetioaa 
13»,M»  and  Wat  tha  BafoMs  Act  of  mg  and  Arti«aM«ll-ea^9»i-W4.  and  »tt  of  Regulations  tg.  TbaaTor^s 
amount  oCasssto  of  each  Und  bald  dorug  any  year  may  ordinarily  be  detarmtaad  by  dividing  by  3  tba  anm  at 
the  amount  of  such  ssasU  held  at  the  beginning  of  the  taxabto  period  aad  the  amount  held  at  the  end  of  tba  taxaUa 
period.  Tn  wrh  naae  the  amniint  of  admlisflile  aoants  may  bast  ^o  dotrnntnert  frfln  (1  )thoboUnreibaot  to  attha 
bcglBntaig  ot  the  period  mI/w(aI  with  respect  to  tha  iteais  in  ScbedoiM  F  and  O  and  (3)  tba  balance  riieet  as  at 
thsendofthepanodoarrsspandinglyadjustad.    ButlfataaytlmedaringthataxaUepertedasubetantialchanca 


See  sohedule 


has  tahan  plaoe  m  the  amount  of  sudi  assets,  tba  avacsga  amount  must  ba  dotaorinad  as  provldad  ta  Aitfcia 
leiBegnlattaM45.   Ia  sneh  cam  show  in  detail- 
it)  Tha  computation  af  such  amount; 

(f)  tmnimt  of  liisiliiilisHiteasw»ibiH  at  beginning  of  the  taxable patod;) 
(d)AaBonnt  of  inadmtooiMoaosota  held  at  end  of  taxabto  period;  g 

(0  Avarago  amount  of  inadmlstibteasaata  held  during  taxable  parted; 
(/)  AaMoat  of  adaitoslbtossseta  held  at  begtaning  of  taxabto  pelted; 
(I)  Amount  of  admimlMa  assets  held  at  the  end  of  taxaMapwiod;  ( 

(k)  ATersgaaBMoatofailmlsBiMaassstahsiddnriaftazablepariod;        ( 
(0  8amof(r)ph]s(t); 
(f)  PBrc«B|afawhich(()toof(f). 
This  paresatafa  0)  should  be  apidied  to  tba  amooat  appaaiiag  on  Una  7,  Bchadnto  B,  ia  order  to  obtatai  tat 
I  of  laadntortMa  assets,  which  rtwdldbaantarad  OB  Una  t.BAednlaB. 


-97- 

Fagie  8  of  BHwb 
QUESTIONS. 


KIND  OF  BUSINESS. 


1 .  By  BMAiu  of  the  kry  letters  gi\-«fi  below,  identiiy  the  cwpontion't  mtin  iocome- 
Tnorfucing  activity  with  one  of  the  genenl  cIbmbi,  md  follow  thia  by  « ipeml  deachptioii 
of  the  bufineae  sulTuicnt  to  give  the  iaformAtioa  ctlled  for  under  e*ch  j^eaeral  cUm. 

A. —  Agricultura  and  related  induatriea.  includini;  (uhing,  logging,  ice  harveatiag,  etc.. 
including;  the  leaan^  of  •urh  property.  State  the  (woduct  or  producta.  B.— Miaiig  awl 
riuarrying.  iocludtiig  goa  and  oil  wella.  Include  the  le:\aing  of  such  property.  State 
tVe  product  or  procnicta.  C. — Manufacturing.  State  the  product  aiid  alao  the  material 
if  not  implied  by  the  name  of  the  product.  D. — Conf^niction— cxrav-atiooa,  buildings, 
bridgoe,  railroada,  ahipa,  etc  ,  aL«  equipping  and  inatalling  «mo  with  ayatema,  devices, 
or  machinery,  without  tlieir  manufacture.  State  nature  of  structurea  built,  materiak 
osed,  or  kinid  of  installations.  11.— Tranfportatitm — rail,  water,  local,  etc.  State  the 
kind  and  apecial  product  transported,  if  any.  It.— Public  utilities— gas  (natural,  coal, 
or  water);  electric  light  or  power  (hydro or  ste«mteoer«ted};  beating  (steam  or  hot  water); 
telephone;  waterworks  or  power.  Bt. — Storage — without  trading  or  profit  from  sales— 
(elevators,  warehouses,  etocryards,  etc.)  State  product  stared.  14.- Leaang  transpor- 
tation or  utilities.  Sute  kind  cl  pcoporty.  V.— Trading  in  foods  boiyht  aixi  not  pn- 
duced  by  the  trading  concern.  State  maaasr  of  trade,  whether  wllolessle,  retail,  or  com- 
munion,  and  product  handled.  Sale*  with  storage  with  profit  primarily  from  aJea.  O. — 
Service— domestic,  including  liotek,  restaurant^  etc.:  anuwments,  other  profemonal, 
(leraonal,  or  technical  service.  State  the  ssrxice.  H«— Finance,  including  banking, 
real  estate,  insurance.  I. — Coocems  not  falling  in  above  claasss  (a)  because  of  combiniog 
several  of  them  with  no  predominant  buaness,  or  (6)  for  other  reasons. 

2.  Concerns  whose  Duaneas  involves  activity  falliag  in  two  or  inate  of  the  above 
general  claane,  iriiere  the  $am  product  is  ccocened,  rfioud  rnport  baa  new  as  identified 
with  but  one  of  the  abo^-e  general  classes;  for  example,  concems  in  A  or  B  which  also 
transport  and  market  their  own  product  exclusive^  or  mainly,  should  still  be  identified 
with  classes  A  or  B;  coocems  in  C  f manufacturing)  which  own  or  control  their  source  of 
material  supply  in  A  or  B  and  which  also  transport,  aell,  or  install  their  own  product 
cxduaively  or  mainly,  should  be  identified  wita  manufacturing;  concema  in  D  may 
control  or  own  aource  of  supply  of  materials  used  excluavely  or  niainly  in  their  construc- 
tive work:  concems  in  El  or  E2  nay  own  or  control  the  smirce  of  their  material  or  power; 
coocems  in  F  may  transport  or  store  their  own  aerchandiss,  but  its  productioo  would 
Identify  them  with  A,  B,  or  C. 

S.  Answers:  ^ 

fa)  General  class  (use  key  letter  derigaatko) S., 

(h)  Main  income-produoag  buanees  (give  qtedfically  the  infomatioa  called  for 
Hiider  each  aey  letter,  alao  whether  actinf  as  priadpal,  or  as  agent  on  < 

rioo;  stato  if  inactive  or  in  liquidatkn)L. 


FnrnltnrA   Mannf^fltnritig 


OTHER  CONCERNS  IN  SAME  BUSINESS. 

^.  Enter  on  the  foUoeriag  lines  the  Damee  and  addrsMse  of  five  1 
in  your  locality  or  section  of  the  country  enflfed  in  the  same  kind  < 

Pnrnltiirft  Co,  Borton 


JEaynfi 


.CQOjLer„Jlf.lllUiHL 


Hayw  QQdjrlftlm  f  1 1 Id  Co  s 


Leilna  Qq, 


INCORPORATION. 


5.  Date  of  incorporation  . 

6.  PndsrthelaweefwliatfStateorcouatnr^MftHftQhtttHltti 

REORGANIZATION  AND  ACQUISITION  OF  MIXED  AGGREGATES  OF  ASSETS. 

has  it,  or  eny 
hteof  tai^lo 
stock  or  oIlMr 


7.  Has  the  corporation,  or  anf  ofitt  vndteaaon,  been  leorganized,  or  I 
o/ito  prtdtuaaon,  taken  over  a  ^ng  buusse  or  acquired  a  mixed  aggreni 
and  intangible  property,  and  paul  for  suck  pnf«tyui  whole  or  in  part  with  < 


JLo. 


and  subadt  o 


securities  dnce  the  close  of  the  preceding:  taxable  period? . 

8.  II  so,  fumiih  a  brief  narrative  histary  of  we  bus 
wowing: 

(a)  The  name  of  the  concern  taken  over  (or  frnm  wUdi  the  picperty  «m  aequiied); 

(ft)  The  nature  of  the  assets  and  liabilities  so  acaoiied; 

(c)  The  total  par  value  of  the  atock  iamed  thartlor: 

(<0  The  value  at  whidi  each  daae  of  aante  wae  cnried  on  the  books  of  the  concern 
from  which  acquired  (submit  a  balance  alieet  of  the  predecessor  coocern  as  at  the  date  of 
acquidtion  or  aa  at  the  close  of  its  last  accounting  period  prior  thereto); 

(e)  llie  value  at  which  each  item  was  carried  oo  the  books  of  the  corpontion  waUwg 
this  return,  and  full  details  of  an^  adjustments  subsequently  made  pertainiog  tksrete  and 
the  baas  on  wiiich  sudi  revaluation  was  made. 

9.  If  patents,  copyri^ta,  secret  proceswa  «r  fermnla,  good  will,  trsde-marka,  trade 
brands,  frandiises,  or  other  intangible  property  were  aoquind,  state  the  basis  oo  which 
their  value  was  determined  and  how  th^r  were  paid  for. 

10.  II  at  the  time  of  any  purchaee  or  reorganLmtion  ae  conteaiphted  in  question  7 ,  any 
property  wae  entered  oo  the  books  of  the  reorganised  eoaosm  or  any  vendee  predeceaeor  at 
a  value  in  excess  of  that  at  which  it  was  carried  on  the  booki  «f  tbe  vendor  concern,  state 
the  baas  on  whidi  thefevaluation  was  made. 

AFFILIATIONS  WITH  OTHER  CORPORATIONS  (TO  BE  ANSWERED  BY 

EVERY  CORPORATION). 

11.  Does  the  corporatioo  own  dirsctlj  flr  eoatnl  throat  dosdy  alHHated  interests  or 
by  a  nominee  or  nominees  over  60  per  caot  of  the  outstanding  voting  cf^ntal  stock  of 

another  corporation  or  of  other  corpotatioasY JIO 

^12.  Is  over  50  per  cent  of  your  outstanding  Yotinc  capital  stock  owned  by 


cor- 


JLq. 


poration  or  by  two  or  more  corporations  that  are  afBUatedt. 

13.  Is  over  50  per  cent  of  your  outstanding  Totiac  capital  stock  as  well  as  over  50  per 


cent  of  the  outstanding  voting  capital  stock  of  anodier  corpc 
tiona  owned  or  controlled  by  the  same  individual  or  r~" 


by  the 


or  of  other  corpora- 

indiviauals 


or  partnerahipe? . 


JbL 


14.  If  the  answer  to  questions  II.  12.  and  13,  or  to  any  of  them,  is  "yes."  answer  tfa* 
following: 

(a)  Did  the  corporation  file  Affiliated  CorporaUons  Questionnaire.  Form  819,  for  1917  or 


subsequent  taxable  years?    Answer  "Yes"  or  "No" — mm If  tho  answer  to  this 

Question  is  "yes,"  a  questionnaire  is  notreouired,  except  under  the  circumstances 
escribed  in  question  (S).  If  the  answer  to  tnia  question  is  "no,"  and  the  answer  to 
questieae  11,  I^,  and  13,  or  to  any  of  them,  is  "yea,"  procure  from  the  CoUector  of  Internal 
Reveaae  for  your  district  Form  819,  which  mall  be  filled  out  and  filed  as  a  part  of  this 
return.    If  the  answer  to  this  question  is  "no,"  question  (b)  need  not  be  answered. 

'6)  Did  substantially  the  aame  conditions,  aa  are  set  out  in  the  questionnaire  filed  for 
1919'or  prior  yean,  obtain  during  the  entire  Uxablo  period  1920?    Answer  "Yes"  or 


"No" "TT.    ■    If  the  anfwer  to  this  question  is  "no,"  a  statement,  setting  forth  the 

particulars  in  which  the  atuatiou  has  chatted,  should  be  attached  to  and  made  a  part  of 
this  return.  If  there  have  been  aubatantialchangca  in  stockholdings,  a  complete  schedule 
of  auch  chaagee  riiould  be  aubmitted  in  the  form  prescribed  in  Tables  3  and  6  of  the 
questionnaire.  If  there  are  companies  other  than  thoso  covered  by  the  questionnaire  for 
1919orprioryearswhich.applyingthetestscoiitained  in  questions  11,  12.  or  13,  may  have 
come  into  the  affiliated  group  since  1019,  a  questionnaire,  Form  819,  is  required  lor  the 
entire  group  for  the  taxable  period. 

VALUATION  OP  CAPITAL  STOCiC 

18.  What  was  the  fair  value  of  the  total  c^tal  stock  of  tho  corporation  ae  determined 
in  the  tost  laiiMint,  tf  any,  of  the  capital  stock  tax?  9 1000000.0,  Dateofthat 
asssesoient JUXJ    1980 -. 

PREDECESSOR  BUSINESS. 

16.  Did  the  corporatioo  file  a  rstom  undsr  the  same  name  tor  the  preceding  taxable 

pwiodf    AnswOT"Yes"or  "No"-Xft.8 If  not,  was  the  corporatioo  in  any  way  an 

outgrowth,  result,  continuation,  or  reorganisation  of  a  business  or  businesses  in  existence 

during  thw  or  the  preceding  taxable  period?    Answer  "Yes"  or  "No''     BO If 

•is  "yea,"  give  name  imd  address  of  eech  predecessor  bu  ' 


BASIS  OF  RETURN. 

17.  Is  this  return  made  oo  the  basis  of  actual  receipts  and  disbursements? ILCL— 

If  not,  describe  fuDy  what  other  baa«  or  method  was  used  in  computing  net  income 

4oora»l : 

' '     ■  I.  I         .,..,■■, - .11.   ■■ ,■■■,< 

GOVERNMENT  CONTRACTS.  v 

18.  Have  any  adiustments  been  made  during  the  taxable  period  on  account  of  con- 
tract or  contracts  with  the  Government  or  its  agencies  or  in  any  Gov^nmcnt  contract  or 
ooa^acts  from  which  the  corporation  derived  income  directly  or  indirectly,  throu^  the 

opetatioos  of  a  claim  board  or  otherwise?   Answer  "Yes"  or  "No".  MO..  ..    If  so,  sUte 

the  amounts  involved  8 ZZ ;  whether  or  not  such  amounts  are  included 

^*  ;  and.  if  not,  was  an  amended  return,  accounting  for 


inthisretam .  _ 

the  additioaal  income,  filed  for  the  taxable  pieriod  in  which  the  contract  vt»  tvrmi- 

nated7.J!!:!t Submit  a  schedule  ahowiiij;  full  particulars  of  the  contract,  date 

eatarsd  into,  date  the  work  ceased  under  said  contract  or  contracu,  and  the  amount  and 
■atuie  of  this  adjustment. 

AMORTIZATION. 


19.  Has  smtwtiiatinn  been  daimed?    Answer  "Yee* 
state  for  what  year -JZ::: Amount  8 r::; 


•No' 


JIA. 


nV 


PREPARATION  OF  RETURNS. 

20.  Did  the  corporation  employ  anyone  especially  to  prepare  or  advise  in  the  prepara- 
tion of  this  retom?    Answer  "Yes"  or  "No"  .JKj8J9 If  so,  give  name  and  address 

and  state  to  what  tatent  such  asa stance  or  advice  was  received :. .  .. 

BoBton  Audit  Co  a B.<i8.t;.o.n.,..Jift9-9..L-. 

LIST  OF  ATTACHED  SCHEDULES. 

Eater  bekw  a  Ust  of  all  sdiedules  accompanying  this  return,  giving  for  eadi  a  brief 
title  and  the  echednle  number. 

8ifth«.lul«.Jl8 Maniif  act  wing  c.oai^.8 


3flhBdultt.-A4 IaxalLLflL-.Lit.Qxty.Boud...In.t.ftr.«.a.tL 

Sflb.eiiaft--.Ai;fe..„-Ordinarx  4-M.cfi8.afliry..  9zpe.R39.fiL 

3alifi.diila..AL3 CiimpfiLiisAtloiL..of...0f£ifiLe.rja 

aflhft.d»le..JL1.4.  -Bftp.ftl.r.8i , 

Schedule  A15  Interest 

Sohadaie  416     Taxes 


Sohedi 


LprafiLatioJi 


gfthftdnle . tf 7       yfialXgwftb le  geaeryes. 

aclifidalft._R Add  it  lona  ■.tLQ.Sttr.pIiia. 

aclLednLlfl._ftl fi.QO.d.Iill  ...yaluft. 

achfldnla-J InadnLl8.all3Llfi  ...Asaets .... 

afltoufldalflLJL BalflyofiflLJil».«t9 


SCHEDULE  K.— BALANCE  SHEETS. 


Attach  hereto  balance  dieets  as  of  the  beginniv  i 
balance  dieets  should  he  pre|wred  from  the  bobkaaa) 


tad  end  «f  die  taxable  period  (preferably  in  parallel  columns),  ritofwina  as  neariy  as  practicable  the  details  called  for  below.    (These 

dMoMbeinagreementtherewith.  or  any  differences  diouldM  reconciled,  and  if  this  is  a  consoUdated  return,  balance  riteets  dtould 

be  fumidied  in  accordance  with  paragn^ih  8  «(  paga  1  o(  lastructioos.) 


AS8VT8. 
Caril  (tDBtaAnc  cuti  In  boak  tad  on  hand, 
cstsi  of  d*fWMt ,  Me. ). 

TfideaccMBto(l>cforad«duetlngrM*rT«ilDr 


(lelMdaMttaf). 

Raw 

Work  In 
rtnlthMl 

SuppliM. 

■•aaaaa: 
Dead*— 

U.  8.  DaaosaadoonfMlooa(MchiSSoatoM 

SttMd  MpwMtiT). 
BxMBpt  (munidiial.  StSMk  «*a.X 
Otha. 


All  corpotationa  enj^aged  in  an  inWm 
efi.'^er,  may  suhnil  in  heu  of  aho\-o  Fona 


T»«AewtiBd4 
TsMlHn. 


(tobadMsOia). 


Und. 
Bolldl^ 

Dinvary  soulpsMt. 
Owafarnitiire. 
Otbw  (MSM  charaottr). 
Total. 

br  dspfMlaMnn  wy  bo  dodurtod 


fla*d« 


La«  r— rm  for  ilMwrlotlMi  (Aow  oiBafMaiy 
amsnet  •ppUeabto  to  «eh  flxad  ■«•()> 

«d  wB,  aei  ilhac  Inaasnil*  aasoto: 
Paid  for  Id  eaih  or  «th«r  uiifibi*  propwtr. 
I>ald  for  la  nock  (otbar  than  Mock  divldwds) 
Cnatsd  bf  ttoek  dlvidwd  or  otbcrwiia. 


Ool 
Oo  stock. 


LIABIUTIBS. 
■mMo: 

To'omovs  uid  stockboldan. 
To  otben  (uidudiiig  book  loaaa). 
Acaoaal*  v«|«bte: 
Trade 
Otb«r. 
Aunnd  *ie— sua  tad  losorno.  tho 
wblch  aro  aUowabla  doductioos  from 
ho  dotal  lod). 


crtotlnc 


KaaorvM.  tbo  dMnas  craoting  wtaldi  are  not  aUow^ 
thmifroBi ' 


fk«a  tbo  roipaeUT* 


Toru. 
aeeoonU  or  iloaalaod  «i  tbo  labUitr  iide  o(  tbo  bobneo  tboot 


sbio  dodncthmi  froBi  Inoomo: 
Boamras   lor  tossot  oo  notta 

rwrivablo. 
Otbar  roaarrm  (to  bo  dotaOad). 
Costtal  aodi  outatwdbis  (to  bo  daariflad). 
SaifhM  and  aadMdad 

TOTAU 


and  aeeeoota 


intrastate  trade  or  business  and  reporting  to  the  Interstate  Commerce  Commission  and  to  any  national,  State,  municipal,  or  other  public 
of  thiir  balance  sheets  prescribed  by  said  Conwaiaaoa  or  State  and  muukipal  authorities,  aa  at  tho  begioniog  and  end  of  the  taxable  period. 


1— ie«7t 


-98- 

PlB^  4  of  Btftiim* 
SCHEDULE  I — RECONCILIATION  OF  NET  INCOME  AND  ANALYSIS  OF  CHANGES  IN  SURPLUS. 


1.  NM  hMDOM  from  Scbadolt  A,  Itm  27 

l>  MtalKabi*  income: 

(«)  IttUrest  on  obUsktlons  at  Um  CnUcd  6tmt«  and  iU 

whofly  uempt 

(I)  iBterwt  on  ob4l*Uaiu  <4  SUtes,  larrltorlas,  and  poUtkal  wb- 

(e)  IntaKMt  «■  rwa  Lain  Boiiii'ia'MAiaiiii'fiai^Tirm'Loui 

Act 

(^)  Dividends  oa  Mode  of  dowitUo  eorporaUao*  and  from  fortun 
cori<orulaas  Uiabit  by  tlw  Vnltad  Statu  on  tMr  art 
Incomw 

(«)  Dlvidandj  oo  itoek  olpanuaal  aerrlo*  corpontiou  oat  of 


L 


inp  upon  whlcb  a  f»d*r»l  Ibcocm  tax  bai  b«ea  Impated 
(/)  Proflu  wkieh are  dtriTtd from  tb* aaJo of  rtaaah andwhieh'ara 

oxMapt  uadar  Sactton  23  of  tb*  Mwchant  Marlae  Aot  of  ISao 
(f)  Othit  Items  of  Bcatauble  iDooma  (to  b*  dataUad): 

(DJtejiraxil  at  1  on  .Aljaatmant 


(Si 


iwamafer  bad  daMi, 


«la.(toUdataaad): 


!•) 


4.  TMaloflUaultoS, 
$.  Total  from  Item  U 


C  Nat  proQt  for  y—t  m  ibowa  hy  bookt.  baJBi«  aay  adHMmaaU  an 

_      made  therato  (lum  4  mlBut  «««8)T!. JT:..?!:'  " 

7.  mtplmjfDA  uadlvldad  proflu  aa  tbowa  bg  balaaea  abaM  at  daw  it' 


tuaUa  parted 


•i  Ottarandtttt0swplaa(tobodataaad): 


t.  TMiladiamsStoS, 

10.  Total  from  Item  1« ... 


11.  Sorphu  and  undlvfcUd  praOta  a*  i 
ta«^><a  parted  (ltam»mtoutlta 


Ml 


..JJ 


JOT. 


.\rr.31 


Z7& 

ZOQ 
JQCQ. 


jP.S.6 


JQQO 


5.QQ 

vm 

a6Q. 


.QQ. 

.aa 
aa 


aa 


QQ. 


13.  Coallowabla  deductions: 

(a)  Dooatioas, jratuities,  and  eontributloas 

0)  laoooa  aadproT 


proflu  tasw  paid  to  tiia  t'nitod  Sutes,  iu  poa- 

,  or  forcjgn  oouotrias 

(e)  a^adal  Improvement  taxes  tendinx  to  increase  tbe  value  of  the 
property  assessed 


I. 


(d)  State,  county,  and  municipal  taxes  paid  Iv  banks,  and  otbar 

earporatloiM  based  on  ^e  value  of  Qi«lr  capital  stock 

(«)  rumUara  and  fixtures,  additioos,  or  bett«rmenu  treated  as 


•ipsosst  «a  the  books 

(/)  Raplaoement  and  ronevals 
'  'asurance  premiums  paid 
tor  the  benefit  of  the  eoi 
IndabU 


Ur)  Ivuranoe  premiums  paid  oa  tiia  life  of  an v  ofBoer  or  employaa 

tor  the  benefit  of  the  eoiporatioo  or  biuuiess 

W  Ihtarast  oo  Indebtedness  Incurred  or  cuotiuied  to  purcbaso  or 


eany  aacoritias  (other  than  obUgsHonv  o(  the  Unl'.ed  States 
tmied  after  September  24, 1817),  th<i  interest  upon  which  is 

wholly  exempt  from  taxation......... . . 

Editions  to  stnklnK  fnnd  reserve,  and  reserves  for  t 


(f)  Additions  I 

■Dd  other  oontincenctea  (to  be  detailed): 


bad  ddbu 


o)_31iiklzig...fiinil..r.fta.e.r2J9L 

<D„InLfifimft._ta;K..res9.rie 


m 

OQ 

m 

00. 


700.00- 


^„  n).-.lJi7.fiat.0T.y...re.aer7e. 

U)  Otbar  unallowable  deducuous  (lo  be  detailed): 

(i)..-Cojoanilaa.LQii..i)ii.jat.o.ck. 

(D..J).l9.C.C>ftRlL.-C>n...St.9.ck 

(3)...0r^anlaAl;lQtt..&Lpaji3.e.a 

13.  Tetalafltamll _ 

14.  DiTideods  paid  durlns  the  taxable  period  (sute  whether  paid  in  '^•h. 

stock  of  this  company,  or  other  property): 

(a)  Dau  pald.jj.9AA...^.^   awracter_„Q.ft8h 

(l)I)aU|»ald„lfcMr.ia...6._   Character  ....0.89.1^1 

(e)  Date  paid  .JiajCL. 


U,  OthardeblUtosari4tta(tobadataUed): 


Character. 
Charaeiar. 


.C&Qh. 


0)- 
(0- 


10.  Total  of  Items  Head  IS. 


„...a 

100 


.50 
.60 

fi. 

5 


.000. 
000 

5.00. 


1.......?.. 


18 
9 

.;4o 


:sT. 


QQQ- 
000 


00. 

oo_ 

00. 

ao. 

00 

oo. 


000 


00. 
00 


300 
400 
OOO. 


00 

OQl 

00. 


IM. 


OCT 


SCHEDULES  SUPPORTING  SCHEDULE  A. 

TT>»fen<mii»g»cheJtilwmMtUfan>Mied,Midtho«>pw^H^  Ent«rittineaod»dd««of  capaation  on  ewhiheet 


RxuaiTK  or  MsrmsMa,  bxpaim.  amd  othsk 


aCHSDOlK  At:  COOT  OV  GOODS  SOtD, . 

rmis  CALUO)  pos  sspasatslt. 

mura.Camacala  el  InvMlaii.TMm  im,aBd  (»)  SUln  the  faUowinc  sebedttle.entstinc  oa  liaea  3  and*,  immedl- 
•taiy  betora  the  amoant  eolnmn,  tJba httrns "C,'' or  "C  or  M,"  to Indloau that InvtnLidaiaM Tahiadat Mthar 
watioreost or  market,  whldieverUleww.  ~»iM»«™T«ww«t«uiw 

O)  MvchaMlise  bought  tor  aala 

(D  Coat  of  manu^aoturlnc  or  otharwlae j 


aat  of  manuaeturlnt  or  otherwise  niodueini  toeda.   (SabMltaaMMa  - 

^jssi,v-^^-^^^.^i^s^si^^^,ss^  _i45.6iaa..ao 

.g.457.e;o.ao 

t_-Aaoid&Q..ao. 


fl)  Tlaalafiary  attmhwilii^of  yaar- 
H)  Tatal 


.a9£4flQ.>.QO 

■CBK^U  Al:  OKOM  IXC<»CB  PBOM  OPKBATIOin  OTRBt  THAR  TSADma  OX  MASTU- 


(<)  Tmilnvmij  at  «d  of  yaar. 

(•)  omoiwaiwU 


Sabmlt  a  sebedule  sbowinc  t)ie  nature  i 
Mat  frouped  In  one  amooat.   (For  S 


t  of  tba  priadpal  Itaau  taeindad  herala,  the  miner  Items 
n  asa  pace  3d  Iaatraetioaa,paraciBpba  3  and  3.) 


M  intsraatwaa  derived  durliur  the  taxable  perfod  from  liberty  Bonds  or  oOmt  ebUMdona  of  the  Uoitad 
•mm  issued  daee  SMpMnbwlTnn  (axeapt  vlnory  Liberty  Loan  »»%  Hatm),  or  WwTlnanoa  Cmotm^ 
Jg^l^mntnn  tbaCoUsetor  and  idaMapart  of  thUtetura  8dMi£ttof  T^^ 

■MM  thaamoaat  •(  VlMmy  Ub«7  Loaa  31%  aad  4|K  MoModtfidlr  aAndbad  te  Md  Mfll  owasd 

MtbadataorflaBct)ilai«na,«X000O«.0O 

fltata  Iba  amoiiBt  of  ftoitk  Ubwty  Loaa  41%  IkadMdilad^  adMdbad  IV  Ml  Min  «*w«  at  te  4aM  0^ 


ttblsiatnni,! v 

"^  Oorporadoa  Bonds,  aa  eash  aflhatad  oorporfion  U  entltlad  M WusavdaM.^^  ^^ 

UIM  AS:  TAXABLK  nrmtlST  FROM  AIX  OTHBX  SOOXCMk 

tabmita8cbedu]asbowinctbaaeaioa»iiatai«,aDdamsiiato<tba|)riBdBaIltaMatodadadhaida.tbaml^ 
■a  bdnx  croapad  in  one  aBMmat.  '"  '     """-^        '^^ 

O)  Bare  raa  ladodad  la  tMi  MMi  My  1 


IfM^l 


•J=.T^-. 


(3)  BavayoaladDdadlnthiaiMii 
.JSLQ Xtm,bowma<l 


taxpildati 

FW  interest  on  krdCB  bonda  snbaiit  aaehednlasbowtBi  (a)  name  of  eMBtry.  (>)  kind  of  w... 
aatlanal,  Wafa.  wimWpal,  or  eerparaU),  (e)  amooat  of  pr&dpal,  and  (Oaa^t  ifiSwaL 

wcfiwnmM  A9t  nvroxHDs  or  stock  or  forxigr  cokpokatiors. 

tebmlt  a  acbadnlashowlaitn)  with  respect  to  aaishtorelgBcoipaiatka  taxable  by  tbaVUtadSMatM 
Its  nK  inconie.  (a)  name  d  corporation,  (t)  eountry  in  which  orcaaijad.  (O  total  par  vdna  of  stork  Mmad^S 
(rf),ainMiit  d'dliMsnda:  (2)  same  fnrirmatkn  «ith  remct  tTSSMm^onoiSiM  aMUi^^ 


I'itSaJo^lZJSui^^ir'''*'''''*^  ^^'^  "^'  *•'  aadi  fchle.  «p«altai  ii*  uiibtoW15 

SCHXDCIB  AlO:  GROSS  IHCOta  FROM  AIX  OTHXX  SODXCXS  (ad 

ibadt  asehadolashowlnc  tbaaouna.  nature,  and  unoui 
betnf  grouped  In 

ORDIRAXr  ARD 


^TJ^SLI  PKUOD^  ASCRRTAIRRD  TO  BS  WORTHLBSS  ARD  CHAROSD  OFT  WITBIR 


<») 


t  a  schadula 
tram  other  souroae 
other  than  thoaa  spadiled 


■  tha  uaoimt  (a)  arWnjf  from  tales,  or  aerricca  pravfoosiy  reported  u 
totwest  rent,  wa  tice,  etc.)  prevkusiy  reported  as  income:  (O  arid 
id  above  (to  bo  ItvaUmi).   (Baa  Article  ISl,  RecuUtions  4S.) 


tneoma; 
arisincfraai 


SCHIOOU  AU!  EZHACSnOR.  WKAK  ARD  TKA«  (laehidlai  ebaeleecanee). 

,_.M*  i?'*!P«i*t?*<'*  on  aooomit  of  depreciation,  the  followinc  schedule  must  be  flilad  In,  Hid  tha  tatal 
!!??fi!f'SS'.*''*r!'°J^^  oemspood  with  the  n«ures  reflected  in  the  bdance  sheet.  LaiMl^Jnes  mSt 
aMbatootadadlatbUKtedula.   (See  page  3  of  Instroetlons,  parasraph  10,   and  ArtSas  Wlto  inrBe^ 


Kind  of  property. 
(UbuOdingsrsuta 

themateiidof 
wMckoonsuueted.) 


Uaoh.!.;.. 


Bullllnga 

Pa.tenta 19.20 

Fiiiu&..PJjdiai£L 

Tetd.. 


Data 


mn 


wh«a 
acquired. 


naw. 

JIB.W. 


Coat,  or  if 

aequired  prior 

toller.  i.lSU.tbe 

tairinvkecvdue 

on  that  data. 


610Q0O. 
250000, 

L7QO'o6.. 

■10000. 

QAQOQO^ 


Probable 
tile  after 
acquire- 
ment. 


10. 
60 

id. 

10. 


Amount  of  depredation  charted  oft. 


ThUyear. 


5.51000,.. 

...-.6OQ0.e.... 

.17000.... 


ZTwmz. 


rrevloas  yaais. 


il5.9.4Qa..*. 
-.-.3.9..0QQ.^. 
.0.._. 

.e..OQo^.. 

,204400^ 


NOTt.-If 


ddmed  tor  th»ii^hiri^£S^ftliS^S^^^  ""^  '  »t«em«,t  d>owin(  tha  amount 

8CHSD0U  Altt  XOtPLKTIOR. 


•  ♦18400.  disallowed 


FWm  F(i 
complete 


UadadwtlaBtoddmedonacnMmtord«BlHln.nearerrom  theoollector  Form  D  (mlncr»b).  Form  E  feed>. 
!S^.^i??^*ii^i/JS^  CT  (cUand  fas),  or  Form  T  (Umber),  fill  in  and  file  with  return,  lif 

S. .-!»."**  '"I^PP'^JS*'^  oueetkmnaire  In  previous  rears,  then  file  with  this  return  intorma. 
niiiiaaaiTWiinaciijmr  dipMUia  sdieduleup  to  date,  settijic  forth  in  full  statement  of  all  transactions  baaiw 
mdadiMdeat  ar  aMiloaa  to  vdoe  of  physical  assets  with  explanation  of  how  depledtw  ded^ntontor  (£^ 
p«tiedkaabe«dat«miBad.  In  case  of  timber  thUsbouM  be  done  by  filling  in  FMmT(tlmte). 

■Hr^iJ?WR*.iV«?.'*^!F  9?  }P^  S?J*i¥  ^  CAPITAL  ASSETS  ARD  IdSCSUARBOUS 
UIVBSTMSNTS  (Including  Uquldatlug  divldcods). 


m^immmmtim). 

tabmlt  asehadolasbowlnf  tbaaourse,  nature,  and  amount  of  tha  prtodpd  items  Induded  herdn,  tba  mlaar 
TlM  tetd  ol  the  schedule  shouldbeewsfedaaltM  10,  ScheduiaA.^^ 


T  RXPKR81S  (a 


loaDadtor 


•CRXDULX  A12 
ScbadaiaA). 

tabmlt  a  atatannt  showing  ctaanetar  and  aMMmt  of  tba  priadpd  itams  iadoded  betala.  tha 
befaggraapad^onaaaMoat.  (For  srhadalM  ta  baaabmltiad^lMnmnea  campaaJM  aeapaga 
tkiB8.pan«rapha4to7.)  '  *  *^^ 

BCaiDQU  AlSt  C0MPKRSAT10R  OV  OFfldBS. 

BobmitaaebaiMashowing  far  each  officer  (1) 
itock  o«Ded  or  controUcd:  (eTpretaned,  (»)  eon^ 
amount  of,  and  raaaon  tor  iacraasa.  if  any,  over  prMading  period. 

BttbaJtasctwdtte*p«te«lorM^ampl^^ 
li  at  the  ratad  33,000  or  an  p«aHnm,facUdmllar  to  thosa  called  tor  iaiaspairt  tooOo^ 


3d 


^  CT)  MiM,  (3)  ttBa«r«B«a«  toaseh  dntt«a.(4)  diarnd 
:  (S)  total  eompenrnttoi  far  the  taxable  period,  and  (6) 


8CHSDUU  AMI  XXPAII8 


Aibmit  a  sebodule  showing  the  nature  and  amoant  of  tha  prindBd  Itama  ladnded  harain,  tba  » 
Bdag  grouped  in  one  amount.    (yorclaii!H>narinnofrepalt«aaapie«flriiMtnMHnne,p«»«jT»pjff  J 

SCHXDOLB  AUi  TAXI& 

Botait  a scheduleshowtaig separudy  tor  sadi daM of  taxea  dadoeted.  (a)  cbaraetar.  and  (») 
Mmltoeomudprollutaiaa,  taxes  which  are  a  credit  oadar  Section  33S,  taxee  asaaeaed 


bcMfta  of  a  ^  taadtag  to  iaereasa  tha  vahja  of  tha  property  arsaaaad,  and  States  oouatT,  and  m 
pdd  by  bank»Mjd  other  coraeradenebeaad  en  tha  vilneeflhdrcapltd  stock  w  net  dfcwabia 
oomputlng  tanhia  Inoomeof  nob  caQMHlna.  (See  AMdaiW,  Regulations  4«^SiaeltaR 


inlast 
munidpd 


BevaaneAetdnu. 


.  dedjctlsnsta 
nK»)(S)a(the 


la  eaw.pf  aspoad.of  prepmy,  rmulting  la  a  profit  or  1 
a  MpasaiaUaa  tor  aeon  aaaet. 

loas,  the  fdk>wiBg  schedule  moK  U  fined  la,  odBc 

!•  Badelpnptity. 

3.  Date 
acquired. 

3.  Ace 

when 
aequired. 

4.  Cost,  or  if 

acquired  prior 

to  Uar.  1.1913,  the 

ialr  market  value 

6.  Cost  of 

subsequent 

improve- 

m<nu,itaBy. 

CDeprada- 
tloa. 

7.  Selepriceer 
liquidating 
dfvidenda: 



i.N.ojia..    . 

J. , 

t — 

f 
«.    -_        . 

1 

• 

't 

t. 

3 

». 

RdpnAtorlaai(totdofodumnsCand7mlnustotalotcaIumns4and5),l — .»»  

Stale  whet  ammini,  U  any,  Induded  In  column  4,  represents  good  wfll„  I TJT:^ 

Uaay  of  tha  assets  ware  aoqulrad  prior  to  March  1, 19U,  sute  how  the  fair  markat  Taloe  oo  thet  date  vu 


la  case  of  exchange  of  property,  submit  evtdenoe  Bubmiatlatlac  the  besia  used  In  anidi^  et  the 
value  of  property 


SCHXDCI.X  A2S:  L08SSS  SITSTAIRED   DTTRnrO  THB  TAZABU  PSRX>D  ARD  ROT  COM. 
PBRSATXD  FOR  BY  lltSURARCB  OR  OTHERWISE.     ***~*»   rmiuuu  Anw  wax  <30M. 

A  schedule  Similar  to  the  one  requested  above  should  be  submitted  With  rcspeet  to  leases  d  pnpertT  «^ 
■K  from  flrae,  storms,  stiipwreck,  or  other  cejonity,  or  from  theft,  and  not  oompensated  for  by  inmMaa  <w 
etbarwtse,  except  that  column  7  should  show  "Insuimooe  and  sdvage"  iaetaad  d  "Sala  price  or  UquldtthK 


^y^j^^^^„     . ,. .price  or  UqjUdrtm 

8CHXDULB  A3tt  AMORTBATIOR  OF  WAR  FACUiTIBS. 

The emount  claimed  asa  dad uction  undpr  this  item  should  be snbateatlated by  sdMdoIeonsaiad  1b e^md. 
aaca  with  Sedion  214(a)  9,  Revenue  Ad  o(  JSis  Articles  181  to  188,inehvtve,  dBcgnlaticni  ST        """'^ 

DBCOURT  ARD  PRSMIVM  OR  BORDS  SOLD. 

There  nwst  be  attached  to  the  return  a  schodnle  showing  In  detail  each  Issne  and  sale  ofhoate  aflte 
npertlng  eorporaiion  riving  the  toltovinr  loiormatioa:  («)  Class;  (6)  date  of  sale;  (c)  maturity;  (d)  aBooat  — «*• 
(r)  amount  reelitrd:(/)prHnium  or  discount  prr  annum.  ^^ 

That  proportion  of  tHc  premium  or  discount  applicable  to  the  return  period  mnst  be  reported  dther  aa  ttara 
10 or  lS,Sch«dula  A,  pecef,  unless  the  amount  of  premiums  or  discount  ttu  been  reported  asinoomawaUiwMd 
es  a  deduction  Uprlaryeeta.  (See  Article  M4,EfrJ*ll«>»<i-)  ...wuw«m»wwi 


W»,  tlie  tuxknigmd,  praridflot  sod 


«i  th*  corpontfea  for  wUch  thi«  return  u  made,  beiog  severally  duly  awom,  each  for  himself  dcpooea  and  aays  that  thb  ntam 


fading  the  accomp«aying  achedulea  and  atAtemMita,  has  bewi  eTamined  bv  him  ani  is,  to  the  beat  of  hi*  knowledM  and  belief, »' true  and  cotopiwl©  returu  mMla  in  good'^th.  lor  the 
mhhie  period  as  atoted,  pumiant  to  tha  HavanMn  Ai;t  of  ifli»  aswj  M»»  H<riH>tiont  iiwwd  woder  withority  th^wof  ■  '-w  «^  kwu  muu,  rar  we 


Sirani  to  and  mbaaibed  belon  m*  thia . 


.diqrol. 


PMMdmti 


The  Schedules  below  should  accompany  the  return 

and  are  part  of  the  answer. 

SCHEDULE  A  2. 

MANUFACTURING  COSTS. 


Labor 

Materials 

Supplies 

Fuel 

Overhead  Expense 


$685 , 600 

625 . 840 

48,000 

49,100 

47,560 

$1,456,100 


Issue 

Second  4's 
Fifth  4i's 


SCHEDULE  A  4 
Taxable  Liberty  Bond  Interest 
Principal      Interest  Rec'd 
$30 , 000  $1 , 200 

10 , 000  475 


Interest  Taxable 

0 
475 


$1 , 675 


$475 


SCHEDULE  A  12 
Ordinary  and  Necessary  Expenses 
Office  Expense  $26,910 

General  Adm.  Expense         7,090 
Selling  Expense  65,630 

Insurauice,  etc.  4,000 


$103,630 

SCHEDULE  A  13 

Compensation  of  Officers 

Name 

Duties 

Time 

Shares 

Compensation  Compensation 

Reason  for 

Owned 

1921 

1918-20 

Increase 

J.  Doe 

Pres. 

All 

1,000 

$50 , 000 

$40 , 000 

J.  Roe 

Treas . 

All 

1,000 

50 , 000 

40,000 

Increased 

J.  Hoe 

Sec. 

All 

800 

25,000 

20 , 000 

Responsibil- 
ities 

SCHEDULE  A  14 
Repairs 
This  amount,  $13,000,  was  spent  for  minor  parts,  labor,  etc., 
which  did  not  materially  prolong  the  life  of  the  assets  nor  appre- 
ciably retard  depreciation. 


SCHEDULE  A  15 
Interest 
Interest  on  Bonds  Payable  ($500,000)  6% 
Interest  on  Mortgage  Payable  ($100,000)  6% 
Interest  through  writing  off  Bond  Discount 
Interest  on  Notes  Payable 

Total  Interest 


$30 , 000 
6,000 
5,000 
2,000 

$43,000 


-100- 


SCHEDULE  A  16 
Taixes 
Property  Taxes,  etc. 
State  Income  (Excise)  teix 

Total 


$20 , 000 
30,000 

$50 , 000 


SCHEDULE  A  18 
Depreciation  -  See  page  4  of  Return 


SCHEDULE  E  7 
Unallowable  Reserves 


Sinking  Fund  Reserve 
Inventory  Reserve 

Total  for  Invested  Capital 


$100,000 
28,000 

$128,000 


SCHEDULE  F  2 
Additions  to  Surplus 


Organization  Expense 
Commission  on  Stock 


Jan.  1,  1921 

Original 

Value 

Value 

$20 , 000 

$36,000 

15.000 

55 . 000 

$35,000 


$91 , 000 


Difference 
Restored 
$16,000 
40,000 

$56,000 


Cash  Value 
Good  Will  $275,000 


SCHEDULE  G 
Intangibles  Purchased  for  Stock 
Par  Value  Stock  25%  Stock  1-3-17 
$250,000         $231,250 


25%  Stock  1-1-21 
$228,750* 


♦Value  1-1-21  not  allowed  because  Treasury  Stock  not  deductible  from 
Outstanding  Stock  for  purposes  of  computing  25%  limitation.  There- 
fore, correct  value  1-1-21  is  also  $231,250. 

Book  Value  $275,000.  Value  Allowed  $231,250.  Deducted  $43,750. 

SCHEDULE  I 
Inadmissible  Assets 

(c)  Inadmissibles  Jan.  1,  1921 

(d)  Inadmissibles  Dec.  31,  1921 

(e)  Average  Inadmissibles  1921 

(f)  Admissibles  Jan.  1,  1921 

(g)  Admissibles  Dec.  31,  1921 
(h)  Average  Admissibles  1921 
(i)  Sum  of  (e)  and  (h) 
( j )  Percentage  which  (e)  is  to  (i) 

*See  Explanation  in  Answers. 


$175,000. 
185,000. 
180,000. 
1,786.300.* 
1,894,790.* 
1,840,545. 
2,020,545. 

.089 


SCHEDULE  K 
Balance  Sheets. 
These  are  required  as  part  of  the  Return  to  the  Government,  but 
are  given  in  this  Lecture  as  part  of  the  problem.  They  need  not  be 
repeated  here. 


-101- 


LECTURE  II,  PART  2, 

EXPLANATION  OF  ANSWERS. 

When  the  corporation  return  is  prepared,  it  is  advisable  first 
of  all  to  write  the  Profit  and  Loss  Statement  in  Schedule  A,  page  1, 
showing  the  Taxable  Net  Income.  The  Profit  and  Loss  Statement  in  the 
problem  shows  a  profit  of  $109,070.  The  Statement  contains  non-tax- 
able income  and  unallowable  deductions.  Non-taxable  income  includes 
interest  on  State  Bonds  of  $4,000,  dividends  on  Lumber  Stock  Owned  of 
$5,095  and  $1,200  of  the  $1,675  interest  on  Liberty  Bonds.  The  com- 
pany owned  $30,000  worth  of  Second  Liberty  Bonds  and  the  $1,200  re- 
ceived on  these  is  not  taxable.  It  owned  $10,000  of  Fifth  4f  Victory 
Notes  and  the  $475  received  on  these  is  taxable.  Therefore,  the  three 
above  items  just  listed,  being  non-tajcable,  are  not  included  in  the 
taxable  income  of  Schedule  A  on  page  1  of  the  Return. 

The  following  unallowable  deductions  appear  in  the  company's 
Profit  and  Loss  Statement:  First,  the  deduction  for  Federal  Income 
Tax  for  1920  and  also  for  1921  may  not  be  taken.  Secondly,  the  amount 
deducted  for  Inventory  Reserve  is  unallowable,  and  thirdly,  the  amount 
transferred  to  the  Sinking  Fund  Reserve.  The  taxes  are  a  distribution 
of  profits  and  the  Sinking  Fund  and  Inventory  Reserves  are  known  as 
unallowable  reserves  and  additions  to  them  are  not  allowable  deduc- 
tions. Donations  of  $3,000  are  not  deductible  by  the  corporation. 
Commissions  on  Stock,  Discount  on  Stock  and  Organization  Expense 
written  off  may  not  be  deducted,  as  fully  explained  in  Lecture  7.  The 
remaining  expense  items  in  the  Profit  and  Loss  Statement,  have  been 
placed  on  the  proper  lines  in  Schedule  A.  The  only  thing  to  note  is 
that  line  13  of  deductions  includes  all  expenses  not  specifically 
called  for  on  other  lines.  It  may  be  well  to  note  that  dividends  from 
other  corporations  have  been  included  in  income  and  then  later  de- 
ducted as  expense  (lines  9  and  25),  the  effect  being  the  same  as  if 
such  dividends  were  not  included  in  income  at  all. 

The  book  income,  as  given,  was  $109,070,  while  the  taxable  income 
is  $327,275,  the  difference  being  due  to  the  non-taxable  income  items 
2Uid  unallowable  deductions  described  above. 

Having  written  Schedule  A,  page  1,  the  writer  should  then  turn 
to  Schedule  L  at  the  top  of  page  4  of  the  Return.  This  schedule 
lists  the  difference  between  book  income  and  tsixable  income.  It  be- 
gins by  placing  the  taxable  income  in  the  upper  left  hand  corner. 
To  it  are  then  added  non-taxable  income  items,  because  these  have  been 
included  in  book  income,  which  will  be  correspondingly  larger  because 
of  this  fact.  This  raises  the  taxable  income  of  $327,275  up  to 
$338,570.  On  the  right  hand  side  of  the  same  schedule  a  list  of  un- 
allowable deductions  is  placed.  These  total  $229,500.  Such  amount 
is  then  subtracted  from  the  $338,570,  giving  $109,070  book  income. 
This  schedule,  therefore,  reconciles,  as  its  title  implies,  the  book 
income  with  the  tsixable  income. 


-102- 

Next  the  taxpayer  reconciles  his  Surplus  Account  in  Schedule  L, 
page  4,  of  the  return.  This  account  read  $122,360  when  the  year  began 
and  to  it  has  been  added  the  book  profit  of  $109,070,  giving  a  total 
of  $231,430  in  surplus  for  the  year.   From  this  amount  have  been  sub- 
tracted the  three  dividend  payments  of  $87,700,  leaving  a  balance  of 
$143,730.   These  figures  show,  therefore,  the  totals  of  the  Surplus 
Account  for  the  year.   The  Surplus  Account  in  Schedule  L,  page  4, 
should  reconcile  with  the  Surplus  Account  in  he  tBalance  Sheets  of  the 
problem  at  both  the  beginning  and  end  of  the  taxable  year. 

One  item  in  Schedule  L  may  require  comment.  The  company  took 
$1,000  additional  depreciation  for  Furniture  and  Fixtures  in  its  tax 
return  but  not  on  its  books.   For  purposes  of  reconciliation,  this 
item  is  treated  the  same  as  a  non-taxable  income  item,  because,  having 
omitted  it,  the  books  are  $1,000  in  excess  of  the  Taxable  Income. 

Having  completed  Schedule  A  of  page  1  and  Schedule  L  of  page  A, 
the  writer  should  then  compute  Invested  Capital  on  page  2  of  the 
Return.  The  schedules  on  page  2  are  numbered  E,  F,  G,  H  and  J. 
At  first  these  may  seem  somewhat  confusing,  but  a  brief  study  will 
show  that  they  are  arranged  in  a  useful  order.   Schedule  E  contains 
the  Invested  Capital  as  it  appears  in  the  Balance  Sheets  and 
on  the  books  at  the  beginning  of  the  year.   Schedule  F  contains 
any  additions  which  are  to  be  made  to  the  book  values  as  of  the 
beginning  of  the  year,  and  Schedule  G  any  subtractions  to  be  made 
from  the  values  as  of  the  beginning  of  the  year.   Therefore,  E,  F 
and  G  together  give  the  Invested  Capital  as  of  January  1,  1921, 
in  the  problem.   Schedule  H  records  any  changes  in  Invested  Capital 
during  the  year  and  Schedule  J  covers  deductions  on  account  of 
Inadmissible  Assets. 

In  the  problem  the  Invested  Capital,  as  it  appears  in  the 
Balance  Sheet,  consists  of  the  following  accounts  at  the  beginning 
of  the  year:   First  Preferred  Stock,  Second  Preferred  Stock, 
Common  Stock,  Paid-in  Surplus  and  Earned  Surplus.   These  are  all 
placed  in  Schedule  E.   To  these  are  added  Unallowable  Re- 
serves, properly  defined  in  Lecture  9.   They  consist  of  Sinking 
Fund  Reserve  and  Inventory  Reserve.   Also  to  the  foregoing  is 
added  Donated  Surplus.   These  amounts  are  then  totalled  in  Schedule 
E,  giving  the  Invested  Capital  as  per  the  Balance  Sheets  and 
books.   From  this  amount  is  then  subtracted  in  Schedule  E  any 
Treasury  Stock.   By  consulting  page  2  of  the  Corporation  Return 
figures,  the  handling  of  Schedule  E,  as  described  above,  will  be 
easily  understood. 

Schedule  F  records  any  additions  to  Invested  Capital  above 
the  book  value.   For  practical  purposes  this  becomes  an  im- 
portant schedule.   In  the  particular  problem  the  following  items 
may  be  added  to  Invested  Capital.   First  of  all.  Furniture  and 
Fixtures  are  on  the  books  at  but  $10,  while  it  appears  that  such 
assets  were  purchased  for  $10,000  in  1915,  and  should  have  been 
depreciated  $1,000  per  year  from  1915  to  1920  inclusive,  or 


y  -103- 

$6,000,  leaving  a  balance  at  this  time  of  $4,000.  Therefore, 
the  difference  between  the  $10  book  value  and  the  $4,000  corrected 
value  is  added  to  Invested  Capital  in  Schedule  F.  Also  it  appears 
that  Commission  on  Stock  Account  and  Organization  Expense  Account 
read  respectively  $55,000  and  $36,000  in  1912  when  the  concern 
was  incorporated,  while  these  accounts  now  read  $15,000  and  $20,000 
each.  The  differences  of  $40,000  and  $16,000  should  now  be  added  in 
Schedule  F,  because  the  writing  off  of  these  accounts  or  the 
talking  of  allowable  income  tax  deductions  on  account  thereof  is 
not  permitted.  Therefore,  a  total  of  $56,000  has  been  restored 
in  Schedule  F.  Thirdly,  the  Government  has  disallowed  $18,400 
excessive  depreciation.  The  correct  entry  to  restore  this  item 
to  the  books  would  be  to  debit  Depreciation  Reserve  for  Machinery 
and  credit  Surplus.  Whether  this  is  done  or  not,  the  amount 
should  now  be  added  to  Invested  Capital  through  Schedule  F.  The 
total  for  this  schedule  may  be  obtained  by  inspecting  page  2  of 
the  Corporation  Return. 

Schedule  G  records  any  reductions  against  book  values  as 
they  appear  in  the  Balance  Sheets.  It  appears  here  that  Good  Will 
was  purchased  in  1912.  Its  cash  value  then  was  $275,000,  the 
par  value  of  the  stock  given  for  it  was  $250,000,  and  it  also 
appears  that  25%  of  the  outstanding  stock  March  3,  1917  was 
$231,750,  or  25%  of  $925,000,  and  25%  of  the  outstanding  stock 
at  the  beginning  of  the  year  was  $228,750  or  25%  of  $915,000.  This 
last  change  is  the  result  of  Treasury  Stock  having  been  donated 
to  the  concern  in  December  1920.  The  law  is  that  any  intangible 
purchased  for  stock  shall  not  exceed  whichever  of  the  four  above 
figures  is  lowest.  Therefore,  ordinarily  it  may  not  exceed 
$228,750.  However,  by  special  rule.  Treasury  Stock  once  actually 
sold  and  then  returned  to  a  concern  need  not  be  deducted  from 
outstanding  stock  for  purposes  of  computing  the  limitation  on 
Intangible  Assets.  Therefore,  in  the  above  case,  $925,000  in 
stock  is  used  for  applying  the  25%  limitation,  both  as  of  March 
3,  1917  and  as  of  January  1,  1921.  Therefore  Good  Will  may  not 
exceed  $231,250.  It  is  carried  on  the  books  at  $275,000.  It  is 
therefore  reduced  by  the  difference  of  $43,750  through  Schedule  G. 

Any  other  item  that  may  result  in  an  over-inflated  value  of 
accounts  on  the  Balance  Sheet  is  then  subtracted.  As  pointed  out 
in  Lecture  7,  Stock  Discount  is  not  an  asset  account,  but  a 
valuation  account,  giving  the  correct  value  to  Capital  Stock. 
It  is  therefore  deducted  in  Schedule  G  at  this  time,  the  amount 
being  $20,000.   Schedules  E,  F  and  G,  therefore,  record  Invested 
Capital  as  of  the  beginning  of  the  year,  properly  adjusted. 

Schedule  H  now  records  changes  in  Invested  Capital  during 
the  year.  These  usually  consist  of  additional  Stock  sold 
or  retired  and  any  dividend  or  income-tax  payments.  In  the 
particular  problem  750  shares  of  Common  Stock  were  sold  for 
$75,000  April  1,  1921,  which  means  that  the  Company  increased 
its  investment  $75,000  from  April  1st  to  December  31st  inclusive, 
and  that,  so  far,  this  amount  has  not  been  included  in  Invested 
Capital,  as  Schedule  E  recorded  the  Capital  Stock  as  of  January 


-104- 

1,  1921.  $75,000  in  stock  from  April  1st  to  December  31st 
inclusive  is  the  same  as  $56,506.85  invested  for  the  whole  year. 
This  is  obtained  by  counting  the  number  of  days  from  April  1st 
to  December  31st  inclusive,  or  a  total  of  275  days  and  multiplying 
$75,000  by  275/365.  Note  that  the  day  the  stock  is  sold,  April 
1st,  is  included.  Secondly,  the  concern  retired  $50,000  in  Preferred 
Stock  December  10th.  Therefore,  ordinarily  from  December  10th  to 
December  31st  the  corporation's  Capital  Stock  is  considered  reduced  to 
that  extent  and  a  subtraction  computation  similar  to  that  in  the  case 
of  the  Common  Stock  sold  should  be  made.  However,  by  special  rule,  if 
a  concern  has  made  sufficient  profit  during  the  year  to  retire  its 
stock,  then  no  deduction  is  made  for  purchase  of  its  own  stock. 
In  the  particular  problem  the  company  has  made  over  $300,000  and 
has  evidently  made  sufficient  to  cancel  $50,000  in  Preferred  Stock. 
Therefore,  no  deduction  is  made  at  this  time.  This  is  not  in  con- 
formity with  good  accounting  rules,  in  that  the  retirement  of  stock, 
an  investment  account,  does  not  require  the  making  of  a  profit  for 
its  cancellation. 


In  Schedule  H  is  also  deducted  any  income-tax  payments,  for 
the  reason  that  the  aunount  paid  out  as  Income  Tax  has  been  included  in 
Earned  Surplus  in  Schedule  E,  as  of  the  beginning  of  the  year,  and 
does  not  remain  in  there  for  the  entire  period.  For  a  leap  year, 
42.14%  is  applied  against  the  income  tax  payment  and  the  deduction 
placed  in  Schedule  H;  for  any  other  year  42.26%  is  applied  against 
the  income  taix  paid  during  the  year.  In  the  particular  case  42.26%  is 
multiplied  against  the  $100,000  in  Income  Tax  paid  during  1921  on 
account  of  1920  income  and  the  result,  $42,260.27  (carried  to  7 
places)  has  been  placed  in  Schedule  H. 

The  reason  for  the  above  percentage  is  the  following: 
The  income  tetx  payments  are  due  in  quarterly  installments  on  March 
15th,  June  15th,  September  15th  and  December  15th.  As  in  the 
case  of  dividends,  the  quarterly  installments  are  considered  as 
coming  out  of  Surplus  from  the  date  paid  to  the  end  of  the  year, 
inclusive.  When  the  first  $25,000  has  been  paid  by  the  concern 
on  March  15,  1921,  it  is  out  of  Invested  Capital  from  March  15th  to 
the  end  of  the  year,  or  292  days.  Therefore,  292/365  of  $25,000 
gives  the  deduction  to  be  made  on  account  of  the  first  tax  payment. 
Summarized,  the  deductions  would  ordinarily  be  as  follows: 

292/365  x  $25,000 

200/365  X  25,000 

108/365  X  25,000 

17/365  X  25,000 

The  above  may  be  more  readily  obtained  by  totalling  the  frac- 
tions and  multiplying  as  follows: 

617/365  X  $25,000 

or,  further,  1/4  of  617/365  may  be  used  or  154^/365  and  this  figure 
used  against  the  full  tax  payable,  namely,  $100,000;  that  is, 
617/365  X  $25,000,  will  give  the  same  result  as  154^/365  x  $100,000. 


-105- 

As  the  latter  amount  is  readily  known,  it  is  better  to  use  the 
computation,  saving  the  trouble  of  dividing  the  tax  payable  into 
four  amounts  and  then  multiplying.  However,  154^/365  equals  the 
fraction  42.26%,  so  that  the  tax  payable  may  be  multiplied  by 
42.26%,  as  was  done  in  this  case,  and  the  answer  immediately  obtained 
For  a  leap  year  this  percentage  is  42.14,  as  will  be  observed  in 
the  1920  Corporation  Tax  Form  used  in  the  problem.   It  has  also 
been  necessary  to  describe  the  obtaining  of  the  above  percentage, 
for  the  reason  that  a  concern  with  a  fiscal  year  will  not  be  able, 
in  the  average  case,  to  use  either  of  the  above  percentages,  but 
will  have  to  maike  deductions  by  counting  the  number  of  days  and  mul- 
tiplying the  fractional  results  against  the  quarterly  tax  instal- 
ments . 

Schedule  H  also  records  axiy   deductions  on  account  of  dividends 
paid.  The  rule  is  that  if  dividends  are  paid  in  the  first  sixty 
days,  they  are  presumed  to  come  from  profits  of  prior  years,  which 
profits  have  been  included  in  the  Surplus  in  Schedule  E  and,  con- 
sequently, when  paid  within  this  period  they  should  be  deducted 
in  Schedule  H.  If  paid  after  the  first  sixty  days  no  deduction 
is  made,  as  it  is  presumed  that  they  are  being  paid  out  of  current 
profits.  However,  if  a  concern  has  not  made  a  sufficiently  large 
profit  to  pay  a  dividend  after  the  first  sixty  days,  then  such  divi- 
dend also  comes  out  of  Invested  Capital  through  Schedule  H.  In  the 
problem  given  a  dividend  of  $18,300  was  declared  January  10th  and 
paid  January  25th.  The  date  that  the  dividend  is  payable  and  not 
the  date  it  is  declared  is  the  effective  date.  Therefore  the 
$18,300  is  considered  out  of  Invested  Capital  from  January  25th 
to  December  31st  inclusive,  or  341  days.  Therefore,  341/365  of 
$18,300,  or  $17,096.71,  is  deducted  from  Invested  Capital,  through 
Schedule  H.  During  the  year  other  dividends  were  paid  amounting  to 
$9,400  and  $60,000,  on  March  5th  and  December  1st,  respectively. 
However,  these  gunounts  were  paid  after  the  first  sixty  days  and  it 
appears  in  each  case  that  the  company  had  made  sufficient  profit 
so  that  the  dividends  could  be  paid  out  of  income  of  the  current 
year.  Therefore,  no  reduction  of  Invested  Capital  is  made  on 
account  of  them. 


Schedule  H  is  then  summarized,  the  deductions  for  dividend  and 
income-tajc  payments  slightly  exceeding  the  increase  on  account  of 
Common  Stock  sold,  with  a  net  result  of  $2,849.31  subtracted  from 
Invested  Caipital. 

It  should  be  carefully  noted  at  this  stage  that  the  income 
earned  during  the  current  year  does  not  become  part  of  Invested 
Capital  for  that  year,  but  is  added  to  the  Surplus  and  Undivided 
Profits,  as  of  January  1st  of  the  next  year. 

At  this  stage,  the  totals  of  Schedule  E,  F,  G  and  H  are 
transferred  to  the  proper  lines  of  Schedule  B,  page  1,  and  added 
or  subtracted,  as  the  case  may  be,  thereby  obtaining  Invested 
Capital,  which  result  should  appear  on  line  7  of  Schedule  B,  page  1. 
From  this  result  is  then  deducted  ajiy  reduction  in  Invested  Capital 
on  account  of  Inadmissible  Assets. 


-106- 

Conceming  Inadmissible  Assets,  the  ratio  of  the  Inadmissibles 
to  all  the  assets  is  then  applied  against  the  Invested  Capital 
obtained  through  using  the  four  above  schedules  and  the  amount  sub- 
tracted.  In  the  problem  .089  is  multiplied  against  line  7  of 
Schedule  B,  page  1,  and  the  result  subtracted,  giving  the  Invested 
Capital  for  the  problem. 

In  obtaining  the  ratio  of  Inadmissibles  to  total  assets  the 
following  should  be  noted.   It  is  necessary  to  reduce  all  assets 
to  their  proper  Invested  Capital  value.   Thus,  Discount  on  Stock 
and  Treasury  Stock  appearing  with  the  other  assets  in  the  Balance 
Sheet  are  not  assets  at  all  but  give  the  correct  value  of  the  Cap- 
ital Stock  Accounts.  On  the  other  hand.  Furniture  and  Fixtures 
Account  appears  in  the  Balance  Sheet  at  but  $10,  whereas,  the 
correct  value,  for  purposes  of  Invested  Capital,  is  $4,000.  There- 
fore, it  is  necessary  to  revise  the  figures  as  they  appear  in  the 
Bal£uice  Sheets  before  computing  the  reduction  on  account  of  Inad- 
missibles. 


The  schedules  showing  how  the  correct  values  were  obtained  are 
as  follows: 

Jan.  1,  1921  Dec.  31,  1921 
Balance  Sheet  Asset  Totals  $2,197,260    $2,359,750 

Plus  additions 

Furniture  and  Fixtures  -  Excess  above  Book  Value  3,990 
Orggtnization  Expense  -  Written  Off  -  Now  Restored  16,000 
Commission  on  Stock  -  Written  Off  -  Now  Restored  40,000 


2,990 
18,000 
45,000 


Total 

$2,257,250 

$2 , 425 , 740 

Less  Reduction  of 

Asset  Values 

Jem.  1,  1921  Dec.  31, 

1921 

Treasury  Stock 

$10,000  $10,000 

- 

Discount  on  Stock 

20 . 000  15 . 000 

Good  Will  Reduced 

43,750  43,750 

Appreciated  Value 

in  Bldgs.   42.200  41.200 

Building  Reserve 

39.000  44,000 

Machinery  Reserve 

reduced    141,000  192,000 

Inadmissibles 

175,000  185,000 

470 , 950 

470,950  530.950 

530 , 950 

Admissible  Baletnces  used  in  Schedule  J. 


»1, 786, 300    $1,894,790 


In  the  foregoing,  attention  is  called  to  the  fact  that  assets 
may  not  always  appear  in  the  Balstnce  Sheet  at  their  true  value. 
Furniture  and  Fixtures  Account,  Organization  Expense  Account  and 
Commission  on  Stock  Account  have  been  restored  to  their  original 
Invested  Capital  Value.  On  the  other  hand.  Treasury  Stock  and 
Discount  on  Stock  have  been  deducted,  as  they  do  not  represent  asset 
accounts;  Good  Will  has  been  reduced  to  its  Invested  Capital  value, 
while  Building  ajid  Machinery  Asset  Accounts  have  been  reduced  by  the 
offsetting  reserves,  leaving  the  net  asset  value  in  them. 
On  the  other  hand,  Inadmissibles  have  been  deducted.  Appreciated 
Value  of  Buildings  has  been  deducted  from  the  Building  Account,  so 


-107- 

that  the  extra  $50,000  placed  in  the  Building  Account,  through  ap- 
praisal March  1,  1913,  will  not  be  used  as  part  of  Invested  Capital. 
Of  the  $50,000  appreciated  value  only  the  amounts  given  on  the 
previous  page,  namely,  $42,200  and  $41,200,  remain  undepreciated 
in  the  building  value  for  Jan.  1921  and  Dec.  1921. 

Regarding  property  value  resulting  from  appraisal,  the  proper 
way  to  handle  this  is  to  charge  the  asset  directly  with  the  in- 
creased amount,  as  was  done  in  this  case.   The  offsetting  balance 
should  be  placed  in  an  account  called  Surplus  from  Appreciation. 
Each  year  that  part  of  the  depreciation  due  to  appreciated  value 
should  be  charged  against  the  Surplus  from  Appreciation  Account. 
In  this  way  none  of  the  appreciation  will  appear  in  the  Earned 
Surplus  Account  and  the  balance  due  to  appreciation  will  be  known 
as  of  any  one  time  by  inspecting  the  Surplus  from  Appreciation  Ac- 
count.  In  the  list  of  Admissible  Asset  figures,  it  appears  that 
the  net  asset  value  of  the  buildings  is  $250,000,  less  $39,000 
in  the  Reserve  and  less  $42,200  in  the  Appreciated  Surplus,  as  at 
the  beginning  of  the  year.   Therefore,  both  these  amounts  have  been 
subtracted  from  the  asset  total.   In  the  case  of  Machinery,  the 
Reserve  read  $159,400  at  the  beginning  of  the  year,  and  this  has 
been  reduced  to  $141,000,  because  $18,400  of  the  depreciation 
taken  has  been  disallowed  by  the  Government,  leaving  only  $141,000 
actual  depreciation  to  be  deducted  from  the  Machinery  Account,  to 
bring  it  down  to  its  net  Invested  Capital  value. 

Attention  should  be  called  to  the  fact  that,  for  purpose  of 
Inadmissible  Asset  computation.  Bond  Discount  is  considered  an 
Admissible  Asset.   The  Government  has  taken  the  view  point  that 
this  account  is  a  deferred  charge. 

Having  deducted  the  unallowable  value  of  the  Inadmissibles  in 
Schedule  B,  line  8,  the  result  in  line  9  gives  the  Invested 
Capital  for  the  corporation.   Then  the  taxpayer  takes  the  two 
figures,  first,  the  net  taxable  income  in  line  27  of  Schedule  A, 
and  secondly,  the  Invested  Capital  in  line  9  of  Schedule  B.   With 
these  two  figures  as  a  basis,  the  Excess  Profits  and  Income  Taxes 
are  computed  in  Schedules  C  and  D  on  page  1  of  the  Return,  exactly 
as  described  in  Lecture  10.   First,  an  Excess  Profit  Credit  is 
obtained  which  is  used  as  a  reduction  of  the  income,  subject  to  the 
20%  rate.   Then  the  20%  and  40%  rates  are  applied  against  the 
proper  balances.   In  computing  the  Income  Tax  any  taxable  Liberty 
Bond  interest  and  the  Excess  Profits  tax  are  both  deducted  first. 
For  the  year  1921  the  exemption  of  $2,000  is  not  used  against  the 
tatxable  income,  the  concern  having  made  more  than  $25,000  in  tax- 
able income. 

Pages  3  and  4  of  the  Corporation  Return  call  for  certain  mis- 
cellaneous information,  most  of  which  is  readily  understood  without 
any  special  instruction.   An  inspection  of  these  two  pages  of  the 
Corporation  Return  will  show  what  is  required  as  additional  inform- 
ation. 


-108- 


LECTURE  11 


Question  to  be  Answered. 

Prepare  on  Form  1120,  the  Tax  Return  of  the  Smith  Sales  Cor- 
poration, Tenth  Ave.,  New  York  City,  which  reports  as  follows: 


Sales  -  year  1921 
Cost  of  Sales 


Gross  Profit  on  Sales 
Less: 

Selling  Expenses 

General  Expenses 

Repai  rs 

Teixes  -  State 

Tajces  -  Federal  Income 

Bad  Debts  -  Actual 

Depreciation 

Donations 

Interest  on  Notes  Payable 


Income 

Interest  on  Notes  Receivable 
Interest  on  Victory  Notes  3f 
Miscellaneous  Income 


Net  Book  Profit  1921 


2.000,000 

1 , 650 . 000 

$350,000 

50 . 000 

60 . 000 

5,000 

3,000 

18,000 

3,000 

10,000 

4,000 

3,975 

$156,975 

$193,025 

600 

375 

6,000 

6,975 

$200,000 

Balance  Sheet 


Assets 
Cash 

Accounts  Receivable 
Notes  Receivable 
Victory  Notes  3f 
Merchandise 
Building 

$50 , 000 
100 , 000 
40,000 
10 . 000 
125 . 000 
225 , 000 

Jan.  1,  1921. 

Liabilities 
Notes  &  Accts.  Payable 
Reserve  -  for  Depreciation 
Reserve  -  Bldg.  Extension 
Reserve  -  Merchandise 
Surplus 
Capital  Stock 

>b.  5    -1921-       $5,000 
ily  5    -1921-       25,000 
Income              18,000 

$140 . 000 

40 , 000 

20 , 000 

5,000 

245 , 000 

100,000 

Dividend  Paid 
Dividend  Paid 
Federal  Tax  Paid 

550 , 000 

Fe 
Jv 
for  1920 

$550,000 

-109- 


LECTURE  12 

MISCELLANEOUS  TOPICS 

CONSOLIDATED  RETURNS:  In  two  cases  the  Government  insists 
upon  Consolidated  Returns.  These  are,  first,  where  a  parent 
company  or  holding  company  controls  practically  all  the  stock  of 
subsidiary  companies  or,  secondly,  where  the  stock  of  separate 
companies  is  owned  in  almost  equal  proportions  by  the  same  individ- 
uals. When  returns  are  consolidated  the  usual  Inter-Obligation 
Accounts  and  Inter-Investment  Accounts  are  eliminated  and  any 
Inter-Compajiy  profits  taken  out.  This  is  more  a  matter  of  account- 
ing than  Income  Tax  law.  To  illustrate  briefly  the  handling  of 
Consolidated  Balance  Sheets,  the  following  problem,  given  by  the 
American  Institute  of  Accountants  in  the  C.  P.  A.  examinations  of 
November  15th  and  16th,  1921,  is  worked  out  below  with  proper  solu- 
tion. The  dates  have  been  changed  in  the  problem  so  as  to  illus- 
trate its  handling  under  the  Act  of  1921. 

Companies  A,  B,  and  C  were  all  organized  during  the  year  1918, 
A  and  B  being  engaged  in  manufacturing,  while  C  acted  as  selling 
agent  for  B  at  a  distant  point.  The  capital  stock  of  C  is  owned 
entirely  by  B,  having  been  acquired  at  the  organization  of  C  and 
paid  for  in  cash  at  par.  The  capital  stock  of  A  and  B  is  owned 
entirely  by  John  Doe,  Richard  Roe  and  Mary  Roe  in  equal  proportions 
(one-third  in  each  company).  No  dividends  were  paid  by  either  of 
the  three  companies  during  1921.  It  may  be  assumed  that  the  miscel- 
lEineous  investments  shown  on  the  balance-sheet  of  the  one  company 
and  the  gross  assets  of  all  three  corporations  remained  the  same 
during  the  year  1921. 

Below  are  shown  the  balance-sheets  of  the  three  companies  as 
at  December  31,  1920: 


Balance  Sheet-Company  A-December  31,  1920. 

Liabilities 
Capital  Stock 
Notes  and  Accts.  Pay. 
Surplus 


Assets 

Equipment 

$100,000 

Inventories 

50 , 000 

Accts.  Receivable 

15,000 

Cash 

10 , 000 

Liberty  Bonds  (4r-4\s) 

50 , 000 

Prepd.  Ins.  zuid  taxes 

5.000 

$230,000 

$150,000 
50 , 000 
30 , 000 


$230 , 000 


-no- 
Balance  Sheet-Company  B-December  31,  1920. 


Assets 

Liabilities 

Equipment 

$200 , 000 

Capital  stock 

$250,000 

Inventories 

75,000 

Notes  Payable 

50,000 

Accts.  Receivable 

15,000 

Accts.  Payable 

10,000 

Cash 

5,000 

Surplus 

65,000 

Investments : 

(In  Company  C  (at  cost] 

I  25,000 

Miscellaneous  stocks 

(domestic) 

50 , 000 

Prepd.  Ins.  and  taxes 

5,000 

$375,000 

$375,000 

Balance  Sheet-Company  C-December  31,  1920. 


Assets 


Inventory 

Cash 

Prepd.   teixes 


$35,000 

9,500 

500 


$45,000 


Liabilities 
Capital  stock       $25,000 
Accts.  payable       10,000 
Miscellaneous         5 , 000 
Surplus  5,000 


$45,000 


The  net  income  for  the  year  1921,  carried  to  surplus  (per  books), 
was  as  follows: 
Company  A 

"    B 

"    C 


$20,000 

25,000 

5,000 


$50,000 


The  following  items  appear  in  the  respective  profit-and-loss 
accounts  for  the  year  1921: 


Income  and  profits  taxes  paid  for  1920 

Int.  Accrued  on  Liberty  Bonds 

Int.  paid  on  indebtedness  incurred  to 

carry  Liberty  Bonds 
Capital  additions  charged  to  profit 

and  loss 
Dividends  received  from  miscel?.aneous 

investments 


Compainy  A  Company  B  Company  C 
$1,500    $2,000 
2,125 

3,000 

1 , 000      750 

3,000 


Prepare  balance-sheet  as  at  December  31,  1920  for  tax  purposes, 
and  also  statements  showing  (1)  the  determination  of  the  net  tax- 
able income  of  the  group,  (2)  calculation  of  invested  capital  and 
(3)  calculation  of  income  and  profits  taxes  payable  by  the  group 
for  the  year  1921. 

(Problem  Adapted  from  the  A. I. A.  Examination  of  Nov.  16,  1921.) 


-Ill- 


Solution  Under  1921  Act 
Consolidated  Balance  Sheet 


Assets 

A 

B 

Equipment 

$100,000  $200,000 

Inventories 

50, 

,000 

75, 

,000 

Accts.  Receivable 

15, 

,000 

5, 

,000 

Cash 

10, 

,000 

5, 

,000 

Liberty  Bonds 

50, 

,000 

Investment  in  C 

25, 

,000 

Domestic  Corp. 

Stocks 

50, 

,000 

Prepd.  Items 

5, 

,000 

5, 

,000 

Accts.  Rec.  C 

10, 

,000 

Combined  Consolidated 


35 , 000 
9,500 


500 


$300 , 000 

$300 . 000 

160 , 000 

160 . 000 

20 , 000 

20,000 

24.500 

24.500 

50 , 000 

50 , 000 

25.000 

50 , 000 

50 . 000 

10.500 

10 , 500 

10 , 000 

Totals 


230,000  375,000  45,000  650,000   615,000 


Liabilities 
Capital  Stock 
Notes  &  Accts. 

Payable 
Accts.  Pay.  B. 
Surplus 

Totals 


150 , 000  250 , 000  25 , 000  425 , 000 

50,000   60,000   5,000  115,000 

10,000  10,000 

30,000   65,000   5,000  100,000 


400,000 
115,000 
100 , 000 


230,000  375,000  45,000  650,000   615,000 


There  have  been  eliminated  the  Capital  Stock  Account  of  Company 
C  owned  by  Company  B  and  the  amount  owed  by  C  to  B. 


Invested  Capital: 

Capital  Stock    $400,000.00 
Surplus  100,000.00 


Total 
Deduct : 
Income  Tax  42.26% 

Total 
Deduct: 
Inadmissibles 
50/615 


500 , 000 . 00 

1,479.10 

498,520.90 


40,530.09 


Taixable  Income  Schedule: 

Book  Profit         $50,000 

Add: 

Income  Tax  3,500 

Capital  Charges       1,750 


Total 
Deduct : 

Lib.  Bond  Int. 
Dividends 

TAXABLE  INCOME 


55 , 250 

2,125 
3,000 

$50,125 


INVESTED  CAPITAL    457,990.81 


Invested  Capital 
Income 


Computation  of  Tax 


457,990.81 
50,125.00 


8%   Invested  Capital 
Specific  Exemption 

Profits  Credit 


36,639.26 
3,000.00 

$39,639.26 


-112- 


20%  of  Invest.  Cap. 


Income 
Less: 

Profits  credit 


Excess  Profits  Tax 
Income     Credit     Bal.  Ta^ed 
$50 , 125 .00  39 , 639 .26  10 , 485 . 74 

Income  Tax 
50,125.00     Income  tax  at  10% 


Rate  Tax 

20%  $2,097.15 


4,802.79 


2,097.15 
$48,027.85 


Total  tax 


$6,899.94 


The  foregoing  is  merely  an  outline  of  the  way  in  which  Consol- 
idated Returns  should  be  handled.   The  topic,  like  many  others,  is 
a  special  one,  and  those  desiring  to  go  further  into  it  should  read 
the  Laws  in  detail. 

The  lectures,  so  far,  have  endeavored  to  cover  the  more  practi- 
cal and  more  difficult  phases  of  the  subject  of  Federal  Income  Tax 
Law.   There  are  many  more  topics  which  might  be  taken  up  at  this 
time  but  which,  after  the  reader  has  fully  mastered  the  lectures, 
may  be  readily  understood  by  reading  the  Law.   On  the  other  hand, 
there  are  several  topics  which  are  of  such  difficulty  that  they  do 
not  warrant  being  given  in  an  introductory  course  of  this  nature. 
A  few  of  these  are  briefly  commented  upon  in  the  remaining  para- 
graphs below. 

REORGANIZATIONS:   Special  rules  are  applied  in  cases  where 
corporations  reorgauiize  or  where  there  is  a  merger  of  several  cor- 
porations.  (See  Reg.  45,  Section  330.) 

INSURANCE  COMPANIES:   There  are  special  rules  for  the  handling 
of  Returns  of  insurance  companies.  No  special  sections  are  allotted 
to  the  treatment  of  them  in  the  Law  but  each  section  has  some  spe- 
cial mention  of  the  treatment  of  Returns  of  these  companies. 

PERSONAL  SERVICE  CORPORATIONS:   These  companies  consist  of 
incorporated  concerns  whose  income  is  derived  chiefly  from  the 
activities  of  the  stockholders  and  whose  Invested  Capital  is  merely 
nominal.   If  inventories  are  required  by  such  companies  they  are 
not  considered  personal  service  corporations;  also  if  payrolls  are 
required  to  any  extent  for  other  than  the  stockholders  they  lose 
their  identity  as  personal  service  companies.   If  a  corporation  does 
prove  itself  to  be  a  personal  service  one,  it  submits  a  Return  of 
Information  and  each  stockholder  pays  on  his  distributive  share  of 
profits  the  same  as  in  the  case  of  a  partnership.   (See  Reg.  45, 
Section  18.)   (1921  Act,  Sections  242  to  247.) 

FIDUCIARIES:-  if  the  income  is  not  being  accumulated  fiduciaries 
report  in  the  same  manner  as  partnerships  and  personal  service  cor- 
porations, submitting  Returns  of  Information  and  assigning  the 
annuities  to  the  several  beneficiaries  who  pay  a  tax  on  their  dis- 
tributive shares.  Estates  and  Trusts  in  which  it  appears  that  the 
income  is  being  accumulated  submit  a  Return,  take  an  exemption  the 
same  as  a  single  person  and  pay  a  tax  on  the  income.   (See  Reg.  45, 
Sec.  219.)   (1921  Act,  Sec.  225.) 


-113- 


NON-RESIDENT  ALIENS:  These  taxpayers  pay  an  8%  tax  on  all 
their  taxable  income.  They  are  allowed  an  exemption  $1,000.  under 
the  new  law.  Usually,  in  the  case  of  non-resident  aliens,  the 
compeuiies  forwarding  etny  income  to  such  individuals  are  expected, 
under  all  the  facts,  to  withhold  any  tstx  due  to  the  Government  at 
the  source,  in  order  to  be  certain  that  it  is  finally  collected. 
(See  Reg.  45,  Sec.  221.) 

EXCHANGE  OF  PROPERTY:  Where  property  is  exchanged,  having 
no  ready  realizable  market  value,  starting  with  the  year  1921, 
no  gain  or  loss  is  to  be  reported.  Heretofore,  any  exchange  of 
property  was  considered  a  completed  tax  transaction  and  each  tax- 
payer reported  as  the  sales  price  for  the  article  exchanged  the 
market  value  of  the  article  received  at  that  time.  (See  Act  of 
1921,  Sec.  202,  Para.  E.) 

RELIEF  FOR  CORPORATIONS:   All  corporations  which  submitted 
Returns  for  1917  to  1921  inclusive  and  paid  excessive  taxes  may  ask 
for  a  reduction  of  these  under  the  Relief  Sections  of  Regulations 
45,  Sections  327  and  328.  This  relief  is  granted  for  the  Excess 
Profits  Tax  only.   In  order  to  be  entitled  to  it  a  corporation  must 
show  that  unusual  factors  exist  through  which  the  corporation  is  maJc- 
ing  a  profit,  but  which  it  may  not  include  in  its  Invested  Capital. 
Thus,  a  corporation  may  have  a  certain  amount  of  Good  Will  created 
through  advertising  which,  under  the  Laws,  it  may  not  capitalize; 
or  it  may  possess  valuable  patents  on  which  a  profit  is  being  made, 
but  which  have  been  developed  by  the  company  itself  and  which 
may  not  be  capitalized  at  more  than  a  nominal  figure;  or,  in  the 
extreme  cases  the  Borrowed  Capital  of  a  concern  may  be  very 
large  and  at  the  saune  time  not  included  in  its  investment.   If  a  com- 
pany proves  that  such  factors  exist,  the  Government  will  then  com- 
pare its  Excess  Profits  Tax  with  the  average  percentage  of  Excess 
Profits  Taxes  paid  in  its  particular  line  of  industry  and  reduce 
the  tax  accordingly.  This  Section  has  recently  become  of  great  im- 
portance. 

In  submitting  returns  compeuiies  may  report  on  what  is  called 
a  cash  receipt  euid  disbursement  basis  or  an  accrual  basis.  The 
former  refers  to  reporting  sales  only  when  the  cash  is  received 
for  them  and  reporting  expenses  only  when  the  cash  is  actually  paid 
out;  the  latter  reports  sales  and  income  when  the  sales  are  made  or 
the  income  earned,  regardless  of  receipt  and  deducts  expenses  when 
they  occur  or  accrue,  not  when  they  are  paid.  A  corporation  or 
individual  may  also  report  on  a  fiscal  or  calendar  year.  A  fiscal 
year  is  any  taxable  year  ending  on  the  last  day  of  any  month  other 
them  December.  If  an  individual  or  corporation  keeps  books  on 
a  fiscal  year,  then  it  is  necessary  to  report  on  a  fiscal  year  basis. 
A  corporation  reporting  on  a  fiscal  year  basis  pays  a  tax  for  the 
fiscal  period,  whereas  a  partnership  operating  on  a  fiscal  year 
basis,  submits  a  Return  of  Information  for  the  period  and  the  in- 
dividual owners  include  the  fiscal  year  profits  in  their  calendar 
year  Returns  ending  after  the  close  of  euiy  fiscal  year. 


-114- 

As  explained  in  a  previous  lecture,  inventories  should  be 
taken  whenever  necessary  to  obtain  correct  profit.   Inventories 
should  be  priced  at  "cost"  or  "cost  or  market  whichever  is  lower." 
This  means  that  a  concern  may  take  its  inventories  at  cost  every 
year  or  may  use  a  second  method,  namely,  to  take  inventories  at 
cost  or  at  cost  or  market  whichever  is  lower,  for  each  group  of  items. 
Having  elected  one  of  the  above  two  methods,  that  is,  for  example, 
having  elected  to  take  inventories  on  a  cost  basis,  a  company  must 
use  this  same  basis  every  year.  Likewise,  if  a  company  has  elected 
to  use  cost  or  market  whichever  is  lower,  as  a  basis,  this  method 
must  be  used  every  year.  An  exception  was  made  at  the  end  of  the 
year  1920,  in  that  concerns  using  cost  as  the  basis  of  inventory 
were  permitted  to  take  the  market  value  as  of  the  end  of  that  year. 

After  Returns  have  been  submitted,  errors  may  have  been  dis- 
covered by  the  taxpayer.   If  so,  three  different  forms  of  Claims 
may  be  submitted.   The  first  one  of  these  is  a  Claim  for  Refund. 
If  the  taxpayer  has  overpaid  he  may  submit  a  Claim  for  Refund  which, 
as  the  term  implies,  is  a  claim  for  the  recovery  of  the  taxes  paid 
to  the  Government.   Secondly,  he  may  submit  a  Claim  for  Credit. 
In  this  case,  any  over-payment  of  one  year  discovered  by  a  tajcpayer 
may  be  used  in  this  claim  as  a  credit  against  a  tax  payment  for  the 
next  year.  Finally,  there  is  a  Claim  for  Abatement,  which  is  used 
in  case  the  taxpayer  wishes  to  abate  any  special  tax  payment. 
In  the  latter  case,  if  an  individual  computes  his  tax  as  $2,000, 
paying  the  first  three  instalments,  he  may  discover  that  he  has 
overpaid  $500;  therefore  against  his  last  installment  he  may  sub- 
mit a  Claim  for  Abatement. 

Having  studied  these  Lectures,  the  reader  should  be  sufficiently 
familiar  with  the  subject  to  use  the  direct  sources  of  the  Law  to 
gather  a  further  knowledge  of  the  Tax.  The  pamphlets  to  obtain  are 
the  following:   First,  a  copy  of  Regulations  41,  covering  the  1917 
Act;  second,  a  copy  of  Regulations  45,  covering  the  1918  Act  in  effect 
from  1918  to  1920  inclusive;  thirdly,  a  copy  of  the  Revenue  Act  of 
1921,  in  effect  November  23,  1921,  unless  otherwise  specified. 
Having  obtained  these,  the  reader  should  then  make  use  of  the  weekly 
Bulletins  issued  by  the  Government.  Throughout  the  Lectures  occas- 
ional reference  has  been  made  to  Government  Decisions.  These  Decis- 
ions are  issued  in  the  weekly  Bulletins  and  often  explain  and  alter 
the  existing  Tax  Regulations.  They  may  be  obtained  from  the  Govern- 
ment Printing  Office  at  a  nominal  charge  and  are  mailed  directly  to 
the  taxpayer  each  week.  The  Regulations  for  1917,  1918  and  1921  may 
be  obtained  from  the  Government  Printing  Office  without  charge,  or 
from  the  local  Collector  of  Internal  Revenue.  Th"^se  Regulations 
and  weekly  Bulletins  are  the  official  source  of  the  Law. 
There  are  several  valuable  practical  Income  Tax  Services  on  the  mar- 
ket, which  also  should  prove  of  great  value  after  these  Lectures 
have  been  thoroughly  understood,  as  they  contain  reprints  of  the  Law, 
copies  of  Decisions  and  Regulations  and,  to  some  extent,  explanations 
of  the  various  Sections  and  Articles. 


-115- 


LECTURE  12 
Questions  to  be  Answered. 


1.  Under  what  two  conditions  is  it  necessary  for  corporations 
to  submit  consolidated  returns. 

2.  In  what  manner  do  partnerships  and  personal-service  corpora- 
tions report,  as  distinguished  from  the  manner  in  which  indi- 
viduals and  corporations  report. 

* 

3.  Distinguish  between  Claim  for  Abatement,  Claim  for  Credit 
and  Claim  for  Refund. 

4.  What  is  meant  by  withholding  of  tax  at  the  source? 

5.  Do  the  rates  of  taxes  levied  against  non-residents  differ 

from  those  levied  against  resident-aliens  and  American  citizens? 

6.  What  are  the  official  sources  from  which  to  obtain  information 
relative  to  the  Income  Tax  Laws? 

7.  In  what  manner  do  Fiduciaries  report?        ^ 

8.  Under  what  conditions  are  corporations  entitled  to  relief 
\inder  Sections  327  and  328  of  the  1918  Act? 

9.  What  is  meant  by  reporting  on  a  cash  receipt  and  disbursement 
basis  and  on  an   accrual  basis? 


10.  What  is  meant  by  pricing  inventories  at  "cost"  or  "cost  or  market 
whichever  is  lower?" 


INDEX 


Abatement,  claim  for,  114 

Accident  insurance,  10 

Accrual  basis,  113 

Aliens,  nonresident,  2,  113 

Alimony,  9     g,* 

Amortization,  34ja 

Annuities,  21   *4i| 

Anticipated  losses 

Appraisals,  107 

Appreciation,  107 

Army  and  Navy  salary,  11 

Associations,  as  corporations,  69 


Bad  debts,  actual,  33 
Reserve,  1921,  33 
Mortgage  debts,  33 

Banks,  assessments  paid,  31 
Federal  Land  Banks,  9 
Federal  Reserve  Banks,  9 
Funds  deductible,  63 

Baptismal  offerings,  19 

Bequests,  exemption,  8,  9 

Bonds,  interest,  deductible,  62 
Discount  on,  62 
Farm  Loan  Bonds,  9 
Liberty  Bonds,  13-17 
Tax-free  covenant,  43 

Bondholders,  credit  deductible 
from  tax,  43 

Bonus,  common  stock,  23 
Military  bonus,  43 
Salary  bonus,  9,  19 

Borrowed  capital,  73,  74 

Business  expenses,  28 


Capital  assets,  sale  of,  20 
Changes  in  ownership,  12 
Charitable  contributions,  35 
Charitable  corporations,  61 
Children,  exemption  for,  3,  4 
Citizens,  taxable,  2 
Claims  for  abatement,  114 

for  credit,  114 

for  refund,  114 
Commission  on  stock,  66,  67 


Compensation,  19 

Federal,  19 

Personal  service,  19 

State,  12 
Computations  of  t8« 

Corporation,  59,  85-90 

Individual ,  1 
Consolidated  returns,  109-112 
Constructive  receipt,  19,  21 
Cooperative  associations,  11, 

60-61 
Copyrights,  34 
Corporations,  59-114 

Return,  form  1120,  95,  98 

Taxes  on,  59 
Credits 

Corporations,  59 

Individual,  1,  6 


Deductions ,  allowable 

Corporations,  63 

Individuals,  28-36 
Dependents,  credits  for,  2,  3 

Defined,  3 
Depletion,  34 

Deposits,  interest  on,  20,  21 
Depreciation,  deductions,  34 
Depreciation,  excessive,  81 
Devises,  exempt,  8,  9 
Dividends,  cash,  21 
Dividends,  stock,  11 

Received  by  corporation,  63 

individual ,   21 
partnership,  53 
Donations,  35 


Earned  surplus,  72 
Excess-profits  tax,  59,  71-90 

Special  computations,  85-90 
Exchange  of  property,  12 
Exclusions,  8-17 
Exemptions 

Corporation,  59 

Individual,  2-5 

Income  exempt,  8-17 


INDEX  -  Continued 


Expenses,  business,  28 
Experimental  charges,  81 


Fair  market  value,  25,  26 
Farm  income  and  expense,  29 
Fiduciaries,  112 
Fines,  68 
Fiscal  year,  113 


Gifts,  exemption  of,  9 

Sale  of,  1921  rule,  21,  57 
Good  will,  74,  113 
Gross  income,  6,  19-26 


Obsolescence,  34 


Partnership  return,  form  1065,  52 
Patents,  depreciation,  34 

Invested  capital,  74,  81 
Payments  at  source,  113 
Pensions,  9,  29 
Personal  exemptions,  2,  3 
Personal  service  corporations, 112 
Postal  savings,  interest,  20 
Preferred  stock,  23,  24,  74 
Professional  income  and  expense, 

29 


Head  of  family,  3 

Husband  and  wife,  returns  by,  3 


Inadmissible  assets,  75-78 
Income,  definitions  of,  6 
Information  return,  11,  112 
Insurance,  accident,  health, 

life.  War  Risk,  8-10 
Installment  sales,  22 
Intangibles,  depreciation,  34 

Invested  capital,  74 
Interest,  bank,  bond.  Postal 

Savings ,  20 
Inventories,  pricing  of,  114 
Invested  capital,  71-83 

Computations,  59,  85-90 


Rates  of  taxes 

Corporation,  1 

Individual,  59,  85-90 
Real  estate,  lot  sales,  23 
Receipt,  constructive,  19,  21 
Receivers,  fees  of,  19 
Refunds,  claims  for,  114 
Regulations,  Federal,  114 
Relief  from  High  Taxes,  113 
Removal  of  buildings,  31 
Rent,  deductible,  28 

Office  at  home,  29 
Repairs,  deductible,  29 
Reserves,  bad  debts,  33 

Unallowable,  82 
Resident,  defined,  2 
Returns,  writing  of,  38-57,  91- 

107 


Liberty  Bonds,  13-17 
Live  stock,  29,  32 
Living  quarters,  20 
Long-term  contracts,  22 
Losses,  business  and  personal, 

31-33 

Exchange  of  property,  12 


Military  compensation,  11 
Ministers,  room  rent,  8,  11 
Municipal  bonds,  9 


Net  income,  defined,  6 

Normal  tax,  1 

Notary  Public  fees,  12 


Sales 

of  corporate  stocks  and 

bonds,  62 

Capital  assets,  20 

Gifts,  21,  57 
Scrip  dividends,  68 
Seapen,  taxable,  2 
Seizare  of  property,  36 
Shipping  companies,  11 
Smith-Lever  Act,  12 
Soldiers  auid  sailors,  income  of, 

11 
State  Bonds,  9 

Contract  profits,  12 

Salaries,  12 

Securities  exempt,  9 


ii 


i\ 


INDEX  -  Continued 


Stock 

Exchange  of,  12 

Given  as  Compensation,  21 

Invested  capital,  71 

Sale  of,  62 
Stock  dividends,  11 
Stockholders,  taxes  paid  for,  31 
Surplus,  earned,  71 

Paid-in,  71 
Surtsuc,  computation  of,  1 


Tangible  property,  definition, 

73 
Taxes,  deductible,  30 
Nondeductible,  31 
Tax-free  covenant  bonds,  43 
Traveling  expenses,  29 


Treasury  stock,  62,  103 
Trusts.  See  Fiduciaries 


United  States  obligations,  8,  9 


Vessels,  depreciation  of,  36 
Sale  of,  no  tax,  11 

Victory  Notes,  13-17 

Vocational  Rehabilitation  Act 
Income  from,  8-10 


War  Finance  Bonds,  15,  16 
War  Risk  insurance,  8-10 
Withholding  tax  at  source,  113 
Workmen's  Compensation  Insurance, 
not  taxable,  10 


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